IFRS Graded Questions Complete PDF

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Gripping IFRS
Graded Questions
00?
Contents
Parti
IFRS: The pillars

1 Financial reporting framework
2 The framework
3 Presentation of financial statements
Part 2
4
5
6
7
IFRS: Recognition, measurement and disclosure of

income and expenses
Revenue
Accounting for taxation
Taxation and deferred taxation
Accounting policies, changes in accounting estimates and
errors
8 Earnings per share
9 Statement of comprehensive income disclosure
Part 3
10
11
12
13
14
Part 4
15
16
17
18
19
20
Part 5
21
22
23
24
25
26
27
28

assets
Property, plant and equipment and Impairment of assets
Intangible assets
investment properties
Inventories
Statement of financial position disclosure: Assets
equity and liabilities
Share capital
Financial instruments
Provisions and contingencies
Events after the reporting period
Leases
Statement of financial position disclosure: Equity and
liabilities
IFRS: Other recognition, measurement and
disclosure issues
Non-current assets held for sale and Discontinued
operations
Statement of cash flows
Borrowing costs
Foreign currency transactions and forward exchange contracts
Employee benefits
Financial statement disclosure
Government grants and assistance
Analysis of financial statements
Page
Number
Reference
to Gripping
IFRS
Volume-1
3
11
Ch 1
Ch 1
Ch 1
25
41
53
Ch 15
Ch 2
Ch 3
77
109
Ch 18
Ch 23
General
121
147
157
165
175
Ch 5, 6 and 10
Ch7
Ch8
Ch 4
General
183
195
205
215
221
Ch 22
Ch 21
Ch 17
Ch 17
Ch 13 and 14
233
General
91'
239
253
269
279
289
299
313
319
Ch 9
Ch 24
Ch 11
Ch 19 and 20
Ch 16
General
Ch 12
Ch 25
p
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Financial reporting framework
Gripping IFRS : Graded Questions
[Part l]
Chapter 1
Key issues
Question
l.i
1.2
The IASB
Fair presentation
Chapter 1
Question 1.1
The International Accounting Standards Board (IASB), based in London, began operations in
2001.
Required:
a) Describe the objectives of the IASB.
b) Discuss the composition of the IASB.
c) Explain the due process for the development of International Financial Reporting
Standards.
Question 1.2
"Financial statements should fairly present the financial position, financial performance and
cash flows of an entity. The application of IFRSs, with additional disclosure when necessary,
is presumed to result, in financial statements that achieve a fair presentation."
(IASB (2007) IAS 1, Presentation of Financial Statements)
Required:
"Discuss the issues relating to fair presentation and compliance with International Financial
Reporting Standards. Your answer should address the following:
the requirements for fair presentation to be achieved;
inappropriate accounting treatments;
where management believes that departure from a requirement in a statement is

necessary.
Chapter 1
The framework
[Part l|
Chapter 2
The framework
Question
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14
2.15
2.16
Key issues
Qualitative characteristic - reliability
Fair presentation
Qualitative characteristics - measurement
Users of financial statements
Elements of the financial statements
Income received in advance
Self - insurance, an asset or expense?
Deciding whether or not to recognize a brand name
Treatment of an employee incentive payment.
Dividends: timing and recognition
Determining if a river meets the requirements of one of the elements of financial
statements and the respective recognition criteria
Accounting for purchased goods
Recognition and measurement of the costs incurred in planting and maintaining
a tree plantation
Recognition and measurement of the issue and redemption of preference shares
together with correcting journal entries
Treatment of asset revaluation
Advertising expenditure
Chapter
The framework
i
Question 2.1
One of the most important characteristics that a set of financial statements should have is
reliability.
Required:
Explain, in
reliable.
terms of
the Framework, how to ensure that a set of financial statements is
Question 2.2
Fair presentation requires the faithful representation of the effects of transactions, other
events and conditions in accordance with the definitions and recognition criteria for assets,
liabilities, income and expenses set out in the Framework.
(IAS 1, paragraph 13)
Required:
Discuss the implications of the above quote in the context of the relationship between the
Framework and IFRS (International Financial Reporting Standards).
Question 2.3
Measurement is the process of determining the monetary amounts at which the elements of
the financial statements are to be recognized and carried in the Balance Sheet and Income
Statement. This involves the selection of the particular basis of measurement...
(The Framework, Para 99)
Required:
Discuss how effective different measurement models are in achieving the qualitative
characteristics of financial statements.
Question 2.4
The framework is concerned with general purpose financial statements. Such financial
statements are prepared and presented at least annually and are directed toward the common
information needs of a wide range of users.
(Framework for the Preparation and Presentation of Financial Statements, Para 6).
Required:
a) To list the users of financial statements identified by The Accounting Framework and
briefly discuss their needs for information.
b) To briefly discuss the relationship between the information needs of investors and of
other users.
Chapter 2
The framework
Question 2.5
A company issued 100 000 ordinary shares (with a par value of Cl) at an issue price of C1.20
each during the year. The following is the journal entry passed by the accountant:
Dr
120 000
Bank
Share capital
Share premium
Cr
100 000
20 000
Required:
State what element the credit entries represents. Discuss, by way of a process of elimination,
the reason for your answer. A discussion of the relevant definitions provided in The
Framework is required.
Question 2.6
Hazyview Mall Ltd is a shopping center situated in Umzinto, Kwa-Zulu Natal. The company
is in the process of preparing the financial statements for the year ended 31 December 20X3.
Whilst preparing the annual rental reconciliation the accountant found that the bookkeeper
had recognised all rentals received as income, including an amount of C65 000, received in
December 20X3, from a long-standing tenant in respect of his January 20X4 rental.
Required:
Explain, with reference to the relevant definitions and recognition criteria provided in the
Framework, whether or not the treatment of the rental received for January 20X4 as income
in the financial statements of Hazyview Mall Ltd for the year ended 31 December 20X3 is
correct. Where considered appropriate, the correct alternative treatment and correcting
journal entry should be provided.
Question 2.7
Innerstrength Limited is one of your audit clients. During the audit of Innerstrength you came
across the following journal entry:
Dr
480 000
Insurance expense
Insurance loss liability
Cr
480 000
On requesting the accountant to provide supporting invoices from the insurance company, the
accountant explained that the director is of the belief that insurance is the biggest con in
society these days. Over the years that he has paid insurance, his insurance claims have
equated to roughly 20% of his premiums. As a result, Innerstrength decided to self-insure
from the beginning of the year: Innerstrength intends to bear all possible future losses through
its own reserves. Instead of paying an insurance company C40 000 per month, the above
journal has been posted instead.
Chapter 2
The framework
Required:
Discuss the acceptability of the above journal entry in terms of The Framework.
Question 2.8
In an effort to increase lagging sales, BGD Limited decided to sell under a new brand name.
The company spent Cl 500 000 on purchasing a new brand name. Sales have almost doubled
and according to the directors this is ascribed solely to the new brand name. Accordingly, the
Cl 500 000 has been capitalised as an asset.
Required:
Discuss the treatment of the Cl 500 000 with reference to The Framework.
Question 2.9
An international sports and leisure club has recently entered the South African market. The
club pays large incentives to sales representatives to sign up customers on a two-year
contract. The member then has to pay the club a monthly fee for the 2-year period.
The company believes that it should capitalise the incentives paid and amortise them over a
10-year period. This amortisation is based on their experience in Europe where customers
who join on the two-year contract generally remain loyal members of the club after the first
contract has expired. The expectation that members generally renew their contract after the
expiry of the first contract is based on research performed over the last 5 years.
Required:
Discuss the treatment of the incentive payment with reference to The Framework.
Question 2.10
Independent Limited declared a final dividend of CO. 15 per ordinary share on 13 April 20X4
in respect of the financial year ended 31 March 20X4. The accountant, Mr Poll, has recorded
the dividend as an expense on the income statement for the year ended 31 March 20X4 and a
liability on the balance sheet at 3 1 March 20X4.
The financial statements have not yet been finalised.
Required:
Analyse the treatment of the dividend declaration.
Your answer should refer to the relevant definitions provided in The Framework. You should
state whether or not the accounting treatment is acceptable, providing an alternative
treatment where appropriate. A discussion of the recognition criteria is not required.
Chapter 2
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The framework
Question 2.11
McDonalds Farm needs to raise a loan from the bank to buy a new irrigation plant. The
balance sheet, however, shows large liabilities and too few assets according to the farmer. He
tells you that the biggest asset that the farm owns does not appear in the balance sheet - the
river that runs right through the centre of the farm.
Required:
Discuss how the river should be treated in the financial statements with reference to the
Framework.
Question 2.12
Minutemin, a client of yours, sells photocopiers and provides photocopying services. The
manufacturer supplies inventory to Minutemin on the following terms and conditions:
Minutemin pays the manufacturer a deposit of C3 000 per photocopier upon delivery.
The machines have a total cost of C30 000.
The photocopiers are displayed on Minutemins premises and used as demonstration

models until sold.
When an item is sold, the balance of the purchase price, which is determined when the
deposit is paid, is paid to the manufacturer.
Minutemin pays for the insurance of the items while on its premises.
If the items are not sold after 3 months, they can be returned to the manufacturer. This
situation has never taken place as the company keeps only one months inventory on hand
at any one time.
Required:
Discuss how the inventory of photocopiers at the year end should be accounted for in the
financial statements of Minutemin, if at all.
Question 2.13
Lumber Jacks Limited is a company with a primary interest in the forestry industry. The
company purchases large tracts of land and plants scores of trees on these lands. When the
trees reach a certain age, they are either sold to a major paper milling company or to
manufacturers of cheap furniture. The company employs the best lumberjacks in the business
and also boasts the best pine wood in the country. The founder and managing director Jim
Duggan, attributes the excellent quality of the wood to their sophisticated planting process
and regular maintenance and weed control.
You have been approached by the company to help resolve certain accounting issues
pertaining to the year ended 31 December 20X2:
Lumber Jacks Limited bought a farm in the Mpumalanga area that is suitable for growing
pine trees. They paid Cl million for the farm and immediately started to develop the land
and plant young pine trees. This involved the construction of roads to the various planting
Chapter 2
The framework
areas, dividing the farm into sections, and creating fire and wind breaks. Holes were also
dug into which young trees were planted and fertilised. This was done at a cost of
C100 000 per hectare.
Once the trees were planted they had to be watered and the weeds had to be controlled.
The trees also had to be pruned to ensure that they grew straight and tall. This was an
ongoing operation with costs continually being incurred.
After a period of approximately 10 years the trees will be ready for harvest and are
expected to yield a return in excess of 20% per annum on the costs incurred to establish
them.
During the financial year ended 31 December 20X2, Lumber Jacks Limited developed 10
hectares at a total cost of Cl million and also spent C300 000 on watering and
maintaining the trees.
The accountant reflected the cost of Cl.3 million as an expense in the income statement.
The financial director, however feels that there are enough reasons to justify the
capitalisation of the C1.3 million as an asset in the balance sheet of Lumber Jacks Limited
at 3 1 December 20X2
Required:
Discuss the appropriate recognition of the costs incurred in planting and maintaining the
plantation in the financial statements of Lumber Jacks Limited as at 31 December 20X2.
Specific reference should be made to The Framework.
Question 2.14
You are the newly appointed auditor of Keeptrying Ltd, charged with the responsibility of
ensuring that the equity and liabilities section of the balance sheet is fairly reflected. The
following extract from the draft balance sheet and additional information relevant to the
current financial year ended 31 December 20X4 has been given to you:
BALANCE SHEET AS AT 31 DECEMBER 20X4

(EXTRACTS)
Issued share capital
Ordinary share capital: Cl shares
Preference share capital: 10% cumulative, redeemable Cl shares
20X4
20X3
100 000
300 000
100 000
300 000
Additional information:
100 000 ordinary shares of Cl each were issued on 1 January 20X1.
300 000 redeemable preference shares, each with a coupon rate of 10% and a par value of
Cl were issued on 1 January 20X3. These shares are compulsorily redeemable on
3 1 December 20X5 at a premium of CO.10 per share. The effective interest rate is
12.937%.
The preference dividends are declared and paid on 3 1 December each year.
Chapter 2
I*
The framework
Journal entries processed to date in respect of the preference shares are as follows:
Dr
1 January 20X3
Bank
Preference shares
Issue of preference shares
Cr
300 000
300 000
31 December 20X3
Preference dividend
Bank
Payment of preference dividend
30 000
30 000
31 December 20X4
Preference dividend
Bank
30 000
30 000
All amounts are considered to be material.
Required:
a) Provide the following definitions (per the Framework):
i) Liability
ii) Equity
iii) Expense
b) Discuss the recognition of the following transactions:
i)
The issue of the preference shares in terms of the liability and equity definitions.
ii) The redemption of the preference shares (that is, the payment of C330 000 on
31 December 20X5) in terms of the expense definition.
c) Calculate the balance at which the preference shares should be measured in the balance
sheet of Keeptrying Ltd as at 31 December 20X4.

d) Provide the correcting journal entries where considered appropriate.
Ignore taxation.
Question 2.15
Thinkican Ltd is a company that has always measured its plant at cost less accumulated
depreciation and impairment losses. The directors now wish to measure the plant at fair value
less subsequent accumulated depreciation and impairment losses. Revaluing plant to fair
value will result in a substantial increase in its carrying amount. Although the accountant
knows that the increase in value is debited to plant, he is of the opinion that the increase in
value should be recognised as income.
Chapter 2
The framework
Required:
Discuss whether the accountants proposed treatment is correct. Your answer should be based
on the relevant definitions provided in the Framework.
Question 2.16
Quick Fix Ltd is a manufacturing company engaged in the production of adhesives. The
company has not performed well over the past three financial years.
So as to improve on the poor past profits, the Board approved a C2 000 000 advertising
promotion during the year ended 3 1 December 20X8 in order to generate increased sales in
the future. The advertising promotion took place (and was paid for) during December 20X8.
The accountant insists on recognising the C2 000 000 payment as an asset at
31 December 20X8. His reasoning is that future sales will increase as the number of
customers grow due to the advertising campaign.
Required:
Discuss whether you agree with the accountant, making reference to the Framework. Suggest
an alternative treatment if you disagree.
Chapter 2
10
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Presentation of financial statements
[Part l[
Chapter 3
Question
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
Key issues
Components of financial statements and the objective of a statement of
comprehensive income
Profit and loss, other comprehensive income and total comprehensive income
Discussion of consistency
Items requiring separate disclosure
Classification of assets and liabilities
Refinancing of a long-term loan
Basic statement of changes in equity and share capital notes
Basic statement of comprehensive income and notes
Adjusting entries, basic statement of comprehensive income
Basic statement of comprehensive income and statement of changes in equity
Statement of comprehensive income, statement of changes in equity, accounting
policies, items requiring separate disclosure
Discussion on statement of comprehensive income presentation and preparation
of a statement of comprehensive income, statement of changes in equity, and
notes to the financial statements
Statement of comprehensive income, notes and disclosure of borrowings
II
Question 3.1
IAS 1, Presentation of financial statements, sets out the requirements for a complete set of
financial statements.
Required:
a) List the components of a complete set of financial statements.
b) Discuss the reasons for the introduction of a statement of comprehensive income.
Question 3.2
IAS 1, Presentation of financial statements issued in 2007, requires a statement of
comprehensive income to be presented as part of a complete set of financial statements.
Required:
Define and explain the difference between the
income and total comprehensive income.
terms
profit and loss, other comprehensive
Question 3.3
One of the general features when preparing a set of financial statements is consistency of
presentation.
Required:
a) Explain what consistency of presentation means in relation to the presentation of financial
statements.
b) Explain why it is important for an entity to retain the presentation and classification of items
in the financial statements from one period to the next.
c) Detail the circumstances under which a change in the presentation of financial statements
may be made.
'
Question 3.4
Full Stop Limited has a factory in a small Free State town. The wall of a slimes dam at a
neighbouring mine broke in May 20X8, flooding the whole town, including the companys
factoty. The factory was submerged in two metres of mud slime that damaged all the plant and
machinery. The cost of cleaning the factory and replacing the plant and machinery amounted to
C7 500 000. The financial director is unsure how this should be accounted for and disclosed in
the companys financial statements.
Required:
Discuss the recognition and disclosure of the loss incurred by the company in terms of
International Financial Reporting Standards.
'*
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Question 3.5
"Each entity shall present current and non-current assets, and current and non-current
liabilities, as separate classifications on the face of its statement of financial position except
where a presentation based on liquidity provides information that is reliable and more
relevant."
(IAS 1, paragraph 60)
Required:
a) List the criteria applied by IAS 1 in classifying assets as current or non-current.
b) List the criteria applied by IAS 1 in classifying liabilities as current or non-current.
c) Discuss what is meant by the operating cycle of a business.
d) State the classification of inventories that are not expected to be realised within twelve
months of the financial reporting date.

e) State the classification of accounts payable that are not expected to be settled within
twelve months of financial reporting date.

f) Discuss your answers to (d) and (e) above from the perspective of the users of financial
statements.
Question 3.6
Kyoto Limited received a loan of C500 000 from the bank on 1 January 20X4, which is
repayable on 30 December 20X8. On 30 June 20X8 the directors passed a resolution to
negotiate an agreement with the bank to renew the loan for another three years. On
20 August 20X8, an agreement was signed with the bank to renew the loan for a further three
years from 30 December 20X8. The directors approved the financial statements for the year
ended 30 June 20X8 on 15 September 20X8. The directors distinguish between current and
non-current liabilities in the companys financial statements.
Required:
Discuss how the loan should be disclosed in the financial statements of Kyoto Limited for the
year ended 30 June 20X8 in accordance with IAS 1, Presentation of Financial Statements.
Chontfir 3
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Question 3.7
Garmin Limited has the following capital structure at 1 January 20X1:
Authorised share capital

Ordinary shares (Cl each)
12% Preference shares (Cl each)
10% Preference shares (Cl each)
C
300 000
100 000
100 000
500000
Ordinary shares
12% Preference shares
Share premium (arising on ordinary shares)
120 000
100 000
50 000
270 000
The preference shares are non-redeemable.
During the year ended 3 1 December 20X1 the following took place:
A new share issue of 80 000 ordinary shares at Cl.20 each, of which the Managing
Director purchased 1 500 shares.
A new share issue of 50 000 10% preference shares at C1.50 each
Share issue expenses of C5 000 incurred were set off against the share premium
account
There are no components of other comprehensive income
Required:
Disclose the above information in the statement of changes in equity and the notes to the
financial statements for the year ended 31 December 20X1 in terms of International Financial
Reporting Standards.
Accounting policies are not required.
Chapter 3
14
Question 3.8
The following is the trial balance of Eskimo Limited at 31 December 20X8:
ESKIMO LIMITED
TRIAL BALANCE AT 31 DECEMBER 20X8
Retained earnings - 1/1/20X8

Non-current liabilities: Loan from AB Bank
Non-distributable reserves - 1/1/20X8
Share capital
Sales
Interest income
Rent income
Cost of sales
Interest on bank overdraft
Other expenses
Administration expenses
Distribution expenses
Investments
Trade accounts receivable
Bank
Current tax payable
Inventories
Trade accounts payable
Land
Equipment - cost
Equipment - accumulated depreciation
Taxation
(145 000)
(25 000)
(20000)
(240 000)
(580000)
(12 500)
(23 000)
300 000
9 500
250 000
25 000
25 000
50 000
250 000
(8 000)
(12 800)
120 000
(225 000)
200 000
100 000
(40 000)
1 800
Dividends of C15 000 were declared on 31 December 20X8. These had not been paid as
at 31 December 20X8.
Share capital constitutes 120 000 issued ordinary shares with a par value of C2 each.
20 000 shares were issued at par on the first day of the year.
Accumulated depreciation on equipment at 3 1 December 20X7 was C25 000. There have
been neither purchases nor sales of equipment during the year.
Required:
a) Draft the statement of comprehensive income and statement of changes in equity for the
financial year-ended 3 1 December 20X8 and statement of financial position at that date in
accordance with International Financial Reporting Standards. Only the following notes
are required:
Analysts of expenses by function

Profit before tax
15
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Presentation of financial sta tements
b) Show how your answer would change assuming that the dividends had been proposed but
had not yet been formally declared by 3 1 December 20X8.
Question 3.9
The following is the trial balance of Travel Bug Limited for the year ended
31 December 20X3:
TRAVEL BUG LIMITED

Debit
Sales
Rent income
Dividend income
Cost of sales
Credit
480 000
50 000
170 000
105 000
80 000
Depreciation
Interest income
Interest expense
Other expenses
Tax expense
Dividends declared: 30 June 20X3
Retained earnings: 1 January 20X3
Property, plant and equipment
Rent income received in advance: 1 January 20X3
Telephone expense payable: 1 January 20X3
Accounts payable
Current tax liability
Accounts receivable
Loan from South Bank
Share capital
Share premium
Bank
240 000
22 000
100 000
136 590
50 000
63 000
556 000
5 000
3 000
180 000
136 590
528 000
150 000
200 000
20 000
120 000
1 697 000
1 697 000
i.
Rent income received in advance at 31 December 20X3 is C6 000.
Telephone expense prepaid at 31 December 20X3 is C4 000. Telephone expenses are

included in 'other expenses.
Dividends of C30 000 were declared on 31 December 20X3. These have not yet been
paid.
Depreciation is distributed as follows:

- 60% on factory machinery; used to make inventory - all of which has been sold.
- 30% on company cars (used by sales representatives)
- 10% on office computers (used for administrative purposes).
Other expenses are allocated to the entity's core functions as follows:

- Operations: 50%
- Distribution: 30%
- Administration: 20%
f'fwntpr 'S
1A
Required:
a) Process all adjusting journal entries required to finalise the financial statements for the
year ended 31 December 20X3.

Closing transfer entries are not required.
Ignore deferred tax.
b) Prepare the statement of comprehensive income for the year ended 31 December 20X3
using the function method, (showing the breakdown of the costs on the face of the
statement of comprehensive income), and in accordance with International Financial
No notes are required.

No comparatives are required.
Ignore deferred tax.
Question 3.10
The following is the trial balance of ABC Limited at 28 February 20X9, before taking the
additional information into account:
ABC LIMITED
TRIAL BALANCE AT 28 FEBRUARY 20X9
Retained earnings - 1/3/20X8

Non-current liabilities : Loan from S Windle Loan Sharks
Non-distributable reserves - 1/3/20X8
Share capital
Sales
Royalty income
Dividend income
Cost of sales
Interest expense
Salaries and wages
Depreciation
Rates
Electricity and water
Bank
Current tax payable
(100 250)
(52 750)
(2 500)
(36 500)
(300 000)
(200 000)
(100 000)
142 500
9 500
250 000
100 000
10000
25 000
3 000
(118 000)
Inventories
129 000
Accounts payable
Electricity prepaid - 1/3/20X8
Wages payable - 1/3/20X8
Accounts receivable
Equipment (Carrying amount)
Vehicles (Carrying amount)
Land and buildings
Taxation
(64 000)
1000
(2 000)
150 000
40 000
30 000
80 000
6 000
17
Wages of C500 have been paid towards the next years wages.
Electricity of C2 000 is still payable at 28/2/20X9.
Salaries and wages are split between administration, distribution and operations on a
30:20:30 basis.
Rates must be split between administration, distribution and operations on the basis of
floor area used: the administration department uses 25% of the floor area, the distribution
department 15% and the operations departments the balance.
Electricity and water may be split between the operations and administration such that the
operations departments are allocated three times as much as is allocated to administration.
Depreciation is made up of depreciation on office equipment (30%) and vehicles (70%).

Operations and administration use office equipment equally. Depreciation on vehicles
constitutes 20% depreciation on directors company vehicles, (considered to be another
expense) and 80% delivery vans.
A transfer of C50 000 must still be made from retained earnings to non-distributable
reserves.
Required:
a) Prepare the statement of comprehensive income and the statement of changes in equity
for the year ended 28 February 20X9 and the statement of financial position at that date in
accordance with LAS 1. Only the following notes are required:
Analysis of expenses by function
Ignore comparatives
b) Assuming that you are given the following additional information, redraft the financial
statements where necessary:
The loan agreement with S Windle Loan Sharks includes a clause whereby ABC Limited
undertakes to maintain its current ratio at 1.8:1 or higher. If the current ratio drops below
1.8:1, half of the balance owing becomes repayable immediately.
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Question 3.11
Durham Limited is a small company listed on Karachi Stock Exchange. The trial balance of
the company at 28 February 20X6 is shown below:
DURHAM LIMITED
Debit
Ordinary share capital

Non distributable reserve
Retained earnings
Dividends
Land and buildings
Equipment
Accumulated depreciation - equipment
Long term borrowings
Accounts receivable
Inventory
Bank
Accounts payable
Sales
Cost of sales
Other expenses
Finance costs
Credit
5 000 000
440000
1 250 000
100 000
8 140 000
500 000
200 000
1 100 000
262 000
258 000
131 000
141 000
10 500 000
7 500 000
520 000
480 000
600 000
140 000
18 631 000
18 631 000
The following information is relevant:
The authorised share capital comprises 10 000 000 ordinary shares of Cl each. 1 000 000
shares were issued at par on 30 November 20X5.
The land and buildings are used for the supply of goods and for administration purposes.
The land and buildings were revalued on 28 February 20X6 to a fair value of C8 140 000.
This represented an increase of C240 000 over the previous valuation.
Flooding during the heavy summer rains have damaged the equipment. Management
considered it necessary to estimate the recoverable amount of the equipment at
28 February 20X6. The fair value less costs to sell are estimated at C250 000 and the
value in use is estimated at C270 000. This has not been taken into account in preparing
the above trial balance. The amount is considered to be material.
All property, plant and equipment is depreciated using the straight line method.
Inventory with a cost of C62 000 was estimated to have a net realisable value of C50 000
at year end. This has not been taken into account in preparing the above trial balance.
The amount is considered to be material.
Distribution costs include depreciation on buildings of Cl 12 500, depreciation on

equipment of C60 000 and salaries of sales staff of C270 000.
Chapter 3
19
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:
Administration costs include depreciation on buildings of C85 000, depreciation on

equipment of C40 000 and salaries of office staff of 342 000.
Other costs include the fee for the audit of C20 000 and audit expenses of C3 000.
Dividends of C100 000 were declared on 18 March 20X5 in respect of the year ended
28 February 20X5. Dividends of C150 000 were declared on 15 March 20X6 in respect
of the year ended 28 February 20X6.
The standard rate of income tax is 29%.
differences.
There are no permanent or temporary
Required:
a) Prepare the statement of comprehensive income of Durham Limited for the year ended
28 February 20X6 in conformity with International Financial Reporting Standards.

b) Prepare the statement of changes in equity of Durham Limited for the year ended
28 February 20X6 in conformity with International Financial Reporting Standards.
c) In so far as information is available, prepare the relevant notes to the financial statements
for the year ended 28 February 20X6 in conformity with International Financial Reporting
Standards.
The statement of compliance note and accounting policies for the basis of preparation,
property, plant and equipment and inventory are required.
The notes relating to share capital and property, plant and equipment are not required.
Question 3.12
The managing director of Sky Limited presented you with the following draft results of
operations in respect of the financial year ended 30 September 20X9:
SKY LIMITED
DRAFT RESULTS OF OPERATIONS
C 000's
6 700
2150
Gross profit
Other income
Other expenses
General expenses
(5 408)
Depreciation
Auditors fees
Technical fees
Profit before taxation
Income tax expense
Profit after taxation
Dividends on ordinary shares paid 2 February 20X9
Transfer to non-distributable reserve
Retained earnings for the year
Retained earnings at 30 September 20X8
Retained earnings per statement of financial position
Chapter 3
4 500
620
88
200
3 442
(741)
2 701
(240)
(900)
1561
10 110
11671
20

The following items are included in general expenses:-
An amount of C350 000 paid to the auditors in respect of consulting fees on the
installation of a computerised accounting system.
An amount of Cl 800 000 relating to inventory written off when the company's newmanaging director was appointed.
A loss of C300 000 sustained in respect of flood damage of the machinery because the
company was underinsured. The insurance proceeds totalled C900 000.
Other income includes C900 000, a surplus on the revaluation of land. The balance
represents C800 000 in respect of dividends received from listed companies, C260 000 in
respect of dividends received from a subsidiary company and C190 000 in respect of
interest from the subsidiary company.
The company tax rate is 50%.

Technical fees expense comprises of C120 000 paid to Software Consultants Inc. and the
technical manager's salary of C80 000.
The new managing director, wishing to make a good impression and to maximise the eamings
per share of the company has made the following proposals:
The amount paid to the auditors, the inventory write-off and the loss from flood damage
(included in general expenses above) should not appear in the determination of the profit
before taxation but should appear as a special deduction before dividends paid.
The surplus on the revaluation of land (included in other income above) should be
incorporated in the determination of profit before taxation.
Required:
a) Comment on the proposals of the managing director.
b) In so far as the information allows, prepare the statement of comprehensive income,
statement of changes in equity and relevant notes of Sky Limited for the year ended
30 September 20X9, in compliance with International Financial Reporting Standards. All

amounts are to be regarded as material.
c) State what other information you would require in order to present the statement of
comprehensive income in compliance with IAS 1.
Accounting policies are required.
Chaster 3
21
I
V
Question 3.13
Mustard Seed Limited is a small company listed on KSE. The trial balance of the company at
28 February 20X5 is shown below:
MUSTARD SEED LIMITED
Debit
Sale of goods
Rendering of services
Dividends received
Profit on sale of fixtures, fittings and equipment
Cost of goods sold
Distribution costs
Administration costs
Other expenses
Share capital
Retained earnings
Dividends Paid
Fixtures, fittings and equipment
Investments
Accounts receivable
Inventory
Bank
Borrowings
Accounts payable
Credit
8 422 500
140 200
62 800
67 000
6 053 500
505 300
436 000
48 000
2 000 000
112 000
80 000
I 200 000
750000
302 300
250 100
1 395 200
11020 400
100 000
115 900
11020 400

Distribution costs include depreciation of showroom furniture and fittings of C82 000 and
salaries of sales personnel of C320 000.
Administration costs include depreciation of office equipment of C68 000 and salaries of
office personnel of C312 000.
Other costs include the fee for the audit of C25 000 and audit expenses of C4 000.
The share capital comprises 1 000 000 shares of C2 each. An interim dividend of eight
20X4. A final dividend of two cents per
share was declared on 15 March 20X5. The financial statements were authorised for issue
on 20 March 20X5.
cents per share was declared on 15 September
Inventory with a cost of C75 000 was estimated to have a net realisable value of C52 000
at year end. This has not been taken into account in preparing the above trial balance.
The amount is considered to be material.
Borrowings comprise the balance of C100 000 on a loan raised on I June 20X2 and is due
be settled on 30 May 20X5. Interest on the loan is charged at 12% per annum, payable
annually in arrears. The interest for the current year has not been paid. The existing loan
facility gives the entity the discretion to refinance the loan until 30 May 20X6. The
refinancing agreement was concluded on 25 February 20X5.
Chapter 3
22
There are no components of other comprehensive income.
The standard rate of income tax is 30%. There are no permanent or temporary differences
other than those apparent fiom the information given.
Required:
a) Prepare the statement of comprehensive income of Mustard Seed Limited for the year
ended 28 February 20X5 in conformity with International Financial Reporting Standards.
b) Prepare the relevant notes to the statement of comprehensive income and statement of
changes in equity for the year ended 28 February 20X5 in conformity with International
Financial Reporting Standards.

c) Describe, giving reasons, how you would disclose the borrowings in the financial
statements at 28 February 20X5.
r'hantpr
23
Chapter 3
24
Gripping IFRS : Graded
Questions
Revenue
jPart 2|
Chapter 4
Revenue
FB.COM/GCAOFFICIAL
Question
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
Key issues
Short questions relating to revenue recognition
Discounts, rebates and extended credit
Recognition of sales: journals
Rendering of services: discussion and journals
revenue
Sale of goods, rendering of services, interest income: discussion and
note disclosure
Consignment sales: discussion

Estate agents commission: discussion
Rendering of services: discussion and journals
Sale of goods on installment
Sales of goods and services on installment
income, interest income: discussion,
Sale of goods on installment, dividend

journals and disclosure
Prepaid vouchers: discussion
sales
Installment sales: discussion, lay-away
WarramysalL, sales subject
to conditions, option to
return
Sale of goods with service plan

and journals
Sale of call cards and airtime: discussion
Loyalty programs
Sales revenue: recognition discussion
QUESTION 4.1
The following situations relate to revenue
a)
recognition:
IJecember ,
fie# edrwon
on ordinary shares on 31
A company declared its final dividend
with in 45 days to shareholders
meeting. These final dividends will be paid
31 December. The year-end is 31 December.
b) Value added tax
received on sales made.
c) Trade discounts allowed on goods sold

d) Cash discounts allowed on goods sold for cash
e) Settlement discounts allowed on early settlement
0 Goods sold on an instalment sale basis.

New York. The customer in Ney,
g) Goods sold by a company in Ireland to a customer in
York paid the full amount for the goods before the year-end, yet the goods were only
delivered to him after year-end.
h) Goods sold to a customer on a lay-by (lay away) basis.
i)
Goods sold on a bill-and-hold basis.
j) A customer ordered 15 000 cartons of widgets on 31 January. The customer paid for the
widgets on 31 January. Manufacturing of the widgets began on 19 February' and the goods
were completed and ready for delivery on 22 February but were delivered on 3 March.
k) Goods sold on credit on 3 1 May to Mr X who went insolvent on 30 June. The year-end is
31 December.
Required:
Consider the situations above and briefly discuss, with reference to International Fininoi
Reporting Standards, how the revenue should be recognised, if at all.
Question 4.2
i*
Gizmo Limited manufactures and sells vehicle engines used to modify racing cars It
company policy to grant a 5% early settlement discount if the account is settled w
days and a 10% discount if the transaction is paid for in cash on transaction date.
following transactions occurred during the period:
2 January 20X7; Mr Schumi purchased a turbo engine at a list price of C200 000*
paid in cash on transaction date.
1 February 20X7: Mr Frank purchased 3 engines at a list price of C100 000 each
given a trade discount of 10%. He paid in cash on the transaction date.
Revenue
1 April 20X7: Ms Haki. who has been buying engines from Gizmo for the last 10 years
bought an engine at a list price of C400 000 on 60 day terms. These are not considered to
be extended credit terms. Ms Haki paid on 31 May 20X7.
1 May 20X7: Mr. Rory purchased 10 engines at a list price of C100 000 each (on 60-day
terms). Mr. Rory will be selling them to a foreign racing club. In order to foster good
business relations going forward. Gizmo Limited gave him a rebate of 10% to help offset
his selling expenses. Mr. Rory paid on 30 June 20X7.
1 June 20X7: Mr. Bum purchased 10 engines at a list price of C100 000 each (on 60-day
terms), less a 10% rebate. The sale agreement makes it clear that 10% rebate is against
the selling price. Mr. Bum paid on 31 July 20X7.
1 July 20X7: Mr. Mechanic purchased 3 engines to be paid for over a period of two years.
The payment plan is two instalments of C250 000 each, payable in arrears, calculated
using an interest rate of 7.32125%. The cash price of the three engines is C450 000.
The 5% settlement discount is not available to customers who manage to pay within 30 days
if the initial sales agreement involved either the 60-day terms or the extended credit terms.
Required
Provide the journal entry/entries required to record each of the abovemenlioned transactions
for the period ended 3 1 August 20X7.
Question 43
Stores Limited, a retailer, entered in to the following two transactions on 10 January 20X7.
Transaction number 1: Stores Limited sold goods to a customer on the following terms:
Quoted selling price of C160 000.
Payment is due in 5 months time.
only 144 535.

Customers who purchase the goods upfront for cash, will pay
Delivery has been made and the goods cost C85 000.
Payment was received from the debtor on 10 June 20X7.
Transaction number 2: Stores Limited sold goods to a customer
on the following terms:
on 10 January 20X7 with a 9-month

Quoted selling price of C150 000 was received
warranty.
such a transaction with a warranty.

This is (he first lime Stores Limited has entered into
probability of return.
the
and they therefore have no past experience to assess
their current bank account which earns

Stores Limited has deposited this money into
3.5% interest per annum.
Delivery has been made and all costs are known at
C76 000.
If the item is returned, the CI50 000 and the 3.5% interest earned will have to be returned
to the buyer.
The warranty expired without return of the goods on 10 October 20X7.
Required:
Prepare the journal entries to record the two transactions in its general journal for the year
ended 31 December 20X7.
Question 4.4
Ralph Construction builds roads throughout the country. Ralph Construction has previously
maintained and serviced all of its own earth-moving equipment through its Service and
Maintenance Division. This division has since been sold and in its place, Ralph Construction
has contracted with Marks Maintenance Men Limited, (a company specialising in
maintenance of large machinery) to maintain all earth-moving equipment for three years.
The contracted price for this 3-year period of maintenance is C225 000, payable
immediately.
Budgeted costs of providing this service have been drawn up by the accountant of Marks
Maintenance Men Ltd based on 10 years of previous experience:
Year 20X3
Year 20X4
Year 20X5
C30 000
C45 000
C75 000
Required:
a) Discuss how the income for this service contract should be recognised and measured in
the financial records of Marks Maintenance Men Ltd.

The effects of financing are considered to be immaterial in this transaction and should
therefore be ignored (i.e. discounting and interest need not be discussed).
of Marks
b) Show the journal entries relating to this transaction in the accounting records
Maintenance Men Ltd for each of the affected years.
Question 4.5
During the
The Redhill Estate, an active Grape farm, is owned and run by Burnt Limited.
of town
out
current financial year Burnt Limited completed the construction of a unique
cluster development. In addition, Burnt Limited owns and operates a shop on the estate.
Clusters
The development comprises 200 cluster homes of varying shapes and sizes.
150 of these clusters were sold to buyers during the year, for a total of C28 500 000
(inclusive of VAT at 14%). Transfer of these units had been registered in the names of
the buyers by the end of the financial year.
Contracts had been signed for the sale of another 25 clusters, amounting to a total of
C5 000 000 (excluding VAT), but at financial year end, these units had not yet been
Revenue
registered in the names of the buyers. Deposits totalling C250 000 (excluding VAT) had
been received to date in respect of the 25 clusters. These deposits were banked on
1 February 20X4, and earn interest at a rate of 12% per annum. 50% of the interest on
deposits accrues to Burnt Limited, and the other 50% to the buyer.
Shop
Burnt Limited owns and operates a shop on Redhill Estate. The shop has daily grape-tasting,
sells produce from the estate and curios from the area.
The fees received for the grape-tasting amounted to C148 200 (inclusive of VAT).
The produce sold from the estate amounted to C2 500 000 (excluding VAT). The
shopkeeper does not eam a salary, but instead, earns commission of 10% of the selling
price of the produce sold.
The curios are carried on a consignment basis. During the year, the cost of curios
delivered to the store on consignment amounted to C50 000. After the stock count, it was
established that curios costing Cl 500 were stolen during the year. The curios on hand at
the end of the year amounted to CIO 000 at cost. Curios sold to customers totalled
C85 500 (inclusive of VAT).
Required:
a) Discuss the measurement and recognition criteria of IAS 18 Revenue, specifically in
relation to the transactions entered into by Burnt Limited during the year ended
31 March 20X4. Your answer must refer to all the revenue transactions, including the
sale of the clusters and all the activities of the shop.
b) Prepare the revenue note in the financial statements of Burnt Limited, for the year ended
31 March 20X4, as required by International Financial Reporting Standards.
Question 4.6
Ltd sells goods to
Mitch Ltd is a manufacturing concern and Gareth Ltd a retailer. Mitch
include
Gareth Ltd on a consignment basis. The terms of the consignment sales
inventory; and
Mitch Ltd dictates the retail price at which Gareth Ltd sells the
only once the goods have been

Gareth Ltd pays Mitch Ltd the consignment sales price
sold to the public.
000 to Gareth Ltd of which,

During 20X3, Mitch Ltd had sold goods to the value of C500
by Gareth Ltd by year-end. The
goods to the value of C200 000 had not yet been sold
have ever beenreturned by Gareth Ltd, he
accountant of Mitch Ltd stated that since no goods
of C500 (XX .
intends recognising the total consignment sales during the year
Required:
statements of Mitch Ltd for
Discuss how much revenue should be recognised in the financial
the financial year-ended 31 December 20X3.
-5 I
Question 4.7
Fortmann Ltd is an estate agency. The new accountant is unsure how to record the following.
One of the estate agents, Mrs Michelle, secured an offer to purchase a property on behalf
of a seller. Mr Caveman, on 28 December 20X3.
The purchaser, Mr. Anderson, has offered to pay C200 000 for the property.
If the seller, Mr Caveman, accepts the offer, the seller will have to pay the Fortmann
C14 000 in estate agents commission, of which C8 000 will be paid to
Mrs Michelle.
estate agency
The seller accepted the offer on 29 December, but the purchaser has three months to
cooling off period).
retract his offer (called a
Required:
Discuss the recognition of the revenue from the commission on the sale of the property in the
financial statements of Fortmann Estate Agency for the financial year-ended
31 December 20X3.
Question 4.8
Jillianne Ltd is a company that cleans and repairs upholstery for the hotel industry. During
December 20X4, it signed a contract for the re-upholstery of all the furniture in a fifteenstorey beachfront hotel. The contract stipulated the price to be C30 000. Jillianne Ltd
estimated, based on many previous re-upholstery contracts with this hotel, that the total cost
to complete the project would be C18 000.
At 31 December 20X4, Jillianne Ltd had completed the re-upholstery of the furniture on the
hotel's first 3 floors (at a cost of C6 000). These 3 floors are the general public areas of the
hotel including the lobby, lounges, library and dining rooms and thus include most of the
hotels furniture. Since these areas are open to the general public, the furniture on these floors
is also the hotels most damaged furniture.
Required:
a) Discuss how the contract income should be recognised in Jillianne Ltd s financial
for the year ended 31 December 20X4. Your discussion should include the
relevant recognition criteria from IAS 18, Revenue.
statements
b) Show the related journal entries for the year ended 3 1 December 20X4.
Question 4.9
Caravan Limited entered into a sale of ten caravans to Outdoors Limited, a retailer located in
Gauteng, at a selling price of C50 000 per caravan. The normal cash selling price per caravan
is C58 500 (based on cost price plus a 30% mark-up) but a trade discount of C8 500 per
caravan was given since Outdoors Limited is a regular customer and generally buys in bulk.
The sale agreement was signed on 1 March 20X5, and the caravans were transported by truck
to Gauteng on the same day. The transport costs and
related transport insurance are to be paid
for by Outdoors Limited.
Gripping IFRS : Graded Question
Revenue
The sale agreement involves instalments (based on interest of
15% per annum) as follows:
1 March 20X5 - C100 000 (received on 1 March 20X5)

28 February 20X6 - C200 000
28 February 20X7 - C299 000
Caravan Limited uses a perpetual inventory system.
Required:
a) Discuss how the revenue from this sale agreement should be recognised and measured in
the financial statements of Caravan Limited. Calculations should be provided wherever

possible.
Definitions are not required.

Prepare all related journal entries in the general journal of Caravan Limited for the year
ended 31 December 20X5 and 31 December 20X6. Ignore tax.
Question 4.10
DS Motors is a company that retails a high end sports car called the BZ3. As all the customers
of DS Motors are usually very wealthy people, most sales are made for cash.
The managing director of DS Motors has embarked on a campaign to entice customers to

purchase the car by paying in instalments (i.e. instead of cash) as he believes that this will
result in a greater profit for DS Motors.
The details of the campaign are as follows:
of Cl 000 000.
Customers pay three equal instalments annually in arrears
of year 2 and C200 000 at the end of year 3.

January 20X6 under
Ten customers purchased the BZ3 on 1 of
the new campaign. Each BZ3
usually retails for C2 152 817 (i.e. a cash price).
of cost
a
DS Motors normally provides services at price
to be 10%.
A fair market interest rate is considered
plus 20%.
Required:
for the years-ended 31 December
books of DS Motors
Journalise the entries required in the
formation.
the above informal.
20X6, 20X7 and 20X8, to account for
Question 4.11
Roger Ltd is a company that sells and repairs factory machinery. The following is the draft
income statement for the year ended 31 December 20X3:
ROGER LTD
DRAFT STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X3
Sales
Services
Other income
Cost of sales
Operating costs
Profit before finance charges
Finance charges
Profit before tax
Taxation
Profit for the period
Other comprehensive income
Total comprehensive income
20X3
C
120 000
80 000
70 000
(50 000)
(60 000)
160 000
(10 000)
150000
(40 000)
110 000
110 000
20X2
IOOOOO
80 000
80 000
(60000)
_C50_000)_
150 000
(10000)
140000
(40 QQQ)_
100 000
100000
The above statement of comprehensive income has been drafted before taking the following
transactions / information into account:
On 5 October 20X3, a frequent customer ordered a new machine. The sale agreement,
which was signed on the same day, included the following terms:
Cash price (before trade discount): C240 000
Trade discount offered: C40 000
The agreed price would be paid in 3 annual arrear instalments as follows:
C20 000 on 30 November 20X4,

C20 000 on 30 November 20X5 and
C240 000 on 30 November 20X6
The customer indicated that the machine should be delivered as soon as possible.
Roger Ltd ordered the machine from a foreign supplier on 6 October 20X3. The machine
arrived - and was available for delivery - on 1 November 20X3. Due to inefficiencies
within Roger Lids ordering system, the machine was only delivered to the customer5
premises on 30 November 20X3. The customer duly signed
the delivery note on this
date Roger Ltd has the policy of insuring all
inventory from the date of shipment from
the foreign supplier (9 October 20X3) to the dale
on which the inventory is successfully
delivered to the customer (30 November 20X3).
Quest,,
Revenue
The costs incurred by Roger Ltd
in acquiring the machine are analysed
as follows:
Cost
incurred
in:
Total cost (paid to the supplier on 15 December

20X3)
Cost of purchase converted into the
relevant local currency
Ivocal
currency
Cost of shipment from the foreign supplier

to Roger Ltds
20X3
20X3
180 000
150 000
20 000
Cost of shipment and insurance from the premises

of Roger
Ltd to the local customer
20X3
10 000
premises
The effective interest rate is 12.937%.
The tax expense has not yet been adjusted for the abovementioned transaction. The
corporate normal income tax rate is 30% (20X2: 30%). The income from the above
transaction is taxable when recognised as earned in the accounting records and the related
costs are deductible when recognised as incurred in the accounting records.
Other relevant information:
20X3
C
70 000
60 000
10 000
Other income includes the following:

Dividend income
Profit on sale of land
Finance charges includes the following:
Finance charges earned
Finance charges incurred
20X2
c
80 000
60 000
20 000
(10 000)
(10 000)
90 000
100 000
(100 000)
(110 000)
Required:
from the abovementioned
Refer to the relevant recognition criteria and principles
provided in IAS 18.
that would be required in 20X3 and 20X4.

b) Where possible, provide the journal entries
sis
>
31 December 20X3.
Comparatives are not required.

Question 4.12
During 20X3. a large
restore-Hanged
y*
for
in taull OHhese
K*
merchandise, a. year.nd,
vouchers, C2
-HCV ]
Required:
a) Discuss how the revenue from the sale of
prepaid vouchers should be
assuming that there is no expiry date.
b) Briefly discuss how the revenue from the sale of the prepaid
recognised assuming that the vouchers have an expiry date.
rccoeniSed
1:
vouchers should u
Question 4.13
Part A
Battleship Gallactica Limited sold goods under an instalment sales contract. The instalit*were Cl 000 per month for five months with interest charged at 12%per annum. The
took possession of the goods on the date of purchase.
buy1*
fl
Required:
Discuss how the revenue from this sale transaction should be recognised in the
statements of Battleship Gallactica Limited.
financial
No calculations are necessary.

Part B
Battleship Gallactica Limited sold goods on a lay away basis. The instalments were Cl 000
per month for five months. The buyer is only entitled to lake possession of the goods once 1
,'S
the final instalment has been paid.
Required:
in
Discuss how the revenue this sale transaction should be recognised the financial statements
of Battleship Gallactica Limited. No calculations are necessary.
Question 4.14
Sporty Limited is a gym which opened approximately eleven months ago. The gym sells
3
contracts to its customers which includes the following terms:
The user must pay an upfront payment of C3 420 (including VAT of 14%);
The purchaser has unlimited access to the gym for the contract period of three years.
recognised
The gyms directors are trying to make a decision on how the revenue should be
services
over the three year period. According to the research in the gym industry the
majonty
the
provided to the clients is concentrated mainly in the first year, as after this time
than 6
of the clients contracts become dormant ( i.e. the users do not access the gym more
times a year).
gym visits
They have gone further in their analysis and have come up with an analysis of the
the)
per client. These statistics have been analysed by experts who have agreed that
accui tc They have found that the visits to the gym for the average user are as
Year 1
Year 2
Year 3
80S
15%
5%
Revenue
Required:
Discuss how the directors should recognise rrevenue from

the sale of the contract, taking into
the information above. Calculate the amount of
revenue that should be recognised
each year in accordance with LAS 18.
account
Question 4.15
Dumble Door is the financial manager of a chain of general-purpose retail
stores. Warthogs
Limited. He has approached you with specific revenue recognition concerns. He is aware
that in terms of IAS 18, revenue should only be recognised when certain criteria have been
met Of concern to him is whether the significant risks and rewards of ownership would have
passed to the buyer in the following circumstances, and therefore whether Warthogs Limited
should recognise revenue considering whether the other recognition criteria have been met as
well.
a) Warthogs Limited sells broomsticks at a mark up of 25% for C750. These broomsticks
carry a 12 month warranty in terms of which defective broomsticks will be repaired or
replaced for free. Dumble informs you that past experience indicates that 2 out of every
100 broomsticks sold needs to be repaired at an average repair cost of C10Q per
broomstick sold.
b) Warthogs Limited sells a highly specialised MSR air-conditioning system to other
manufacturing shops in their surrounding geographical region. Sale agreements entered
into stipulate that Warthogs Limited is required to install the air conditioning unit at the
buyers premises, as they employ the only MSR technician in the region. 40% of the
sales price relates to the installation of the unit.
c) Warthogs Limited sold a motorised lawnmower on credit to a Dubai garden-landscaping

business (based in the same region as Warthogs Limited) which anticipated being
awarded a contract to maintain the gardens of the vice presidents private aeroplane
hanger. The sales agreement entered into stipulates that the lawnmower may be relumed
if the purchaser is not awarded the gardening contract.
and distributes
d) In addition to selling a wide range of goods, Warthogs Limited publishes
at the end of a
local area newspapers to shops within a 20km radius. Unsold newspapers
or a credit. Dumble has
particular month are returned to Warthogs Limited for refund
informed you that the demand for newspapers is fairly unpredictable.
Required:
recognise revenue in each of the above
Discuss when il will be appropriate for Warthogs to
circumstances:
.
St -pt
Question 4.16
Jabulani Motors Ltd is
90 000 kilometre
dseMing used and new cars.
From 1 October 20X5,
"
5 year /
The arnount charged for each service within a
period is normally C880. Services are
ZLiMotoTwealise
tat
!tgUutmetthtcleU'.o
vehicles.
25% on the sale of new
a gross profit percentage of

to purchase a Cans 1600 for C147
On 1 S March 20X6 Mr Nick signed an offer
5oo
Bank to pay <r the vehicle ln
then cn.fn.-d inlo a loan agreement with Tafeat
Bank a 20% deposit on I Apn|
loan agreement Mr Nick would pay Tafeat
interest would be charged at an
and
arrears
in
H
instalments of C3 948 per month
he would take delivery of
that
stated
the veh
of 12.5% pa. The offer to purchase
'cle On
Jabulam Motors Ltd the fu)i
1 April 20X6 when the Tafeat Bank would pay
an
into
agreement
entered
with his
C147 500. On 31 March 20X6 Mr Nick
month.
per
C475
for
vehicle
the
insure
to
Ltd
Insurance
company
effect*
V**6 |
i*?* * 1
Jabulani Motors Ltd have processed the following journal entry to record the
1 April 20X6:
Debit
Bank
Vehicle sales
147 500
*leon
-Credit
147 500
In August 20X6 Mr Nick brought his vehicle in for its first service.
Jabulani Motors financial year ends on 30 September and during the year 100 Cans 1600t
were sold to customers. At 30 September 20X6 the following services had been performed:
20% of vehicles sold had been serviced for the first time only, and
30% of vehicles sold had been serviced twice.
All amounts are considered material

Required:
a) Discuss how the sale of the Caris 1600 to Mr Nick, should be recognised and measured in
the financial statements of Jabulani Motors Limited for the year ended
30 September 20X6 in accordance w ith International Financial Reporting Standards.
b) Prepare all the relevant extracts from the financial statements of Jabulani Motors Ltd in
respect of the total sales of the Caris 1600 vehicles for the year ended 30 September 20X6
in accordance with International Financial Reporting Standards. Accounting policy notes
are not required.
Ignore VAT.
Ignore the effects of discounting.
Question 4.17
You are currently engaged as a financial reporting
consultant of Bom 2 Speak Ltd, a cellular
communications company. You are assisting in the
preparation of the financial statements for
the year ended 31 December 20X2.
The company was granted its cellular
telephone operator license in 20X0. The ccupfl
intention of bringing low cost cellular packages to a broader spectra" f
cheats who require a "no-frills" cellular
service. The company is run by young, dy"*
entrepreneurs who arc mainly concerned with
the short term profitability of thc comp>"
1 he company is also a registered VAT
vendor.
operates w.th the
Gjfl>niLlFRS : Graded 9,,,.

Rtvenm
contracts with
cAa~edf '
__
CmraC'
T'
" Carte<1 b> lh'
Airtime cards: These cards are so,d for Cl

14 each and entitle the purchaser
.
,
nCtWOrk The Purchascr can receive calls
rnnn period, but can only
month
make calls if he has a call card
durTthis three
to
Call cards: These cards arc sold for C91.20 each and entitle
the user to make calls up to
that value. The purchaser must however, also have an Airtime
card in order to use the call
card.
Management feel that this scheme will enhance their reputation in the cellular industry as a
serious participant and will give them exposure to a niche market.
The PAYS cards (Airtime and Call cards) are sold to various vendors including newsagents,
selected clothing retailers and service stations. The vendors then sell the cards to their
customers. The vendors may not mark up the price on these cards as the price is dictated by
Bom 2 Speak Ltd, but they do earn a commission of CIO per card sold. An invoice is made
out to the vendors in respect of cards dispatched at the date of dispatch. At the end of the
month, the vendors pay Bom 2 Speak Ltd for the cards sold after deducting their commission.
Should vendors wish to return unsold cards, they may do so provided the card is still unused.
Details of cards dispatched to vendors for the 20X2 year are as follows:
Quantity
dispatched
Airtime cards
Call cards
100 000 cards

60 000 cards
Selling price
per card (including
Total
VAT)
C
114.00
91.20
C
11 400 000
5 472 000
vendors:
At the end of the year, the following quantity of cards were unsold by the
Quantity
Airtime cards
Call cards
unsold
10 000 cards
500 cards
of airtime cards (in units) for the last four

An extract from the schedule of monthly sales
months was as follows:
Quantity sold
September
October
November
December
2 900 cards
3 333 cards
3 (XX) cards
6 (XX) cards
tend to take place at the bee'

Research done by the entity indicates that sales
is approximately equal for P
period
month
month, and that the use over the three
of ,i
was done and it was determined

On 31 December 20X2. a computerised check
1 000 cards had 100% Qf the
Us
total of 59 500 call cards sold by the vendors,
C#l1 v*
available.
value
All
call
the
other
of
available and 5 000 cards had 50%
negligible value remaining.
****
'
'
total amount
The accountant. Peter Cyclops is of the opinion that the
the current year.
in
revenue
as
the cards to the vendors should be recognised
Required:
a)
Discuss in detail, the appropriate accounting treatment for the dispatch of the cards ton,.
vendors and the rendering of the cellular service on the PAYS scheme in the
records of Bom to Speak Ltd. Your answer must address the timing of the
account
revenJ
recognition.
You should make reference to the Framework for the Preparation and
Financial Statements' and IAS 18. 'Revenue
Presentation of
You may ignore the accounting treatment for the commissions paid.
Do not do any computations here.

b) Calculate the amount of revenue to be recognised by Bom 2 Speak Limited for the year
ended 31 December 20X2 and show by means of a journal entry how the cash received
from the vendors as well as the related payment of commission would be accounted for.
Question 4.18
Naty Ltd is the primary supplier of traditional medicines to all government organisations ia
the country. The entity operates a customer loyalty programme. It grants customers loyalty
points when they spend a specified amount on their range of traditional medicines
Programme members can redeem their points for further traditional medicines. These points
purchases themselves do not generate any loyalty points. The points have no expiry date and
:\j'.agement has
reliably measured the fair value of each loyalty point to be Cl. One point is
awarded for every CIO the customer spends. The customer takes
delivery of the goods*
date of purchase. No sales are on credit. The entity adopts an
efficient standard costing
system.
Part A
Mrs Tshabalala purchases goods
amounting to Cl 000. She intends to redeem all the loysty
points.
Required:
a)
Discuss the initial recognition and
b) Prepare the journal

entries relating
measurement of the sale of goods to Mrs Tshahslsla
to the sale of goods to Mrs

Tshabalala.
Par! B
Dunng the year ended 31
of Cl 000 000. The December 20XH. Na!y lid sells medicines for a total
20X8 management expectations
were that a total of 80*
Gripping IFRS : Graded Ouextinne
Revenue
outstanding loyalty points would be
redeemed At the end of 20X8. 40 000 points have been
redeemed by customers for goods purchased.
In the 20X9 year, management revised its expectations

and now
be redeemed. Actual points redeemed in 20X9:
41 000.
expects 90%
of all points to
Required:
c) Prepare the journal entries for the year
ended 31 December 20X8 relating
points that have been redeemed at this stage.
to
the total
d) Prepare the journal entries for the year ended

31 December 20X9 relating to the
redemption of loyalty points. {Ignore any sales that were made in 20X9)
Question 4.19
Retail Therapy is a small to medium-sized department store. It sold three hand-crafted statues
(cost price Cl 2 000 each), one to each of the following three customers below. The markup
on cost applied by Retail Therapy is 30%. The details pertaining to the transactions with each
customer are as follows:
Customer A:
This customer paid in cash on the date of delivery.
He negotiated a special 14-day warranty with Retail Therapy.
Past experience indicates that this customer never returns any goods and that the
goods themselves are never faulty.
Customer B:
This transaction was entered into on the last day of Retail Therapys financial year.
a sales consultant not only made this
In an attempt to meet the year-end sales target,
check,
but made this sale knowing that
sale without performing a credit-worthiness
the customer had a previous criminal record for fraud.
the last day of the financial year and
The customer took delivery of the goods on credit
terms).
agreed to pay within seven days (not extended
with
This is the first time Retail Therapy has transacted customer B.
Customer C:
A sale was concluded in and the goods were delivered to customer C one month
earlier.
within 14 days (not extended credit terms) but has
Customer C was due to pay
a recent case
recently fled the country as he was named as the possible mastermind of
of corporate fraud.
, ,
the full
pay
would
C
customer
that
certain
virtually
was
it
sale
At the time of the
customer.
amount owing, as he was a reliable and long-standing
Required:
of the above three transactions.
Briefly discuss, in terms of IAS 18, the accounting treatment
case.
Highlight the main concept in IAS 18 that is discussed in each
You are not required
to
discuss the
definition of revenue, detailed recognition criteria or
disclosure.
FB.COM/GCAOFFICIAL
Solutions to Gripping IFRS: Graded Questions
Revenue
Solution 4.1
a) Dividend income may be recognised by the persons holding the shares (i.e. the
shareholders) on 31st December, being the date on which the right to receive the dividend
is firmly established.
b) Since value-added tax is an amount received on behalf of a third party (the relevant tax
authority) the economic benefit does not flow to the entity receiving it. The value-added
tax should therefore be shown as a liability (a present obligation expected to result in an
outflow of economic benefits).
c) According to IAS 18, revenue should be recognised at fair value of the consideration
received/ receivable, where fair value is calculated by deducting the amount of any trade
discount given. (It is interesting to note that the same principles should be applied when
purchasing goods and receiving trade discount: the cost of purchases should be recorded
net of trade discount received).
d) Entities granting cash discounts to customers should reduce the amount of revenue
recognised on the date of sale.
e) Settlement discounts allowed have to be estimated at the date of sale and the amount of
the revenue reduced accordingly. This is consistent with the requirement of IAS 18 that
revenue should be recognised at the fair value of the consideration receivable (IAS 18,
paragraph 9).
f) A sale of goods on an instalment-sale basis includes a financing perspective. On
completion of the necessary documentation, the customer is able to take the purchased
goods into his custody. The payment for these goods occurs over a period of time and the
total of the instalments add up to an amount in excess of the normal cash sale price. The
reason for this excess is the financing cost that the customer is expected to pay. The
revenue that may be recognised on the date of the sale is the cash sale price. The balance
is recognised as interest income on a time basis, using the effective interest rate method.
g) The revenue from sale of goods should only be recognised when the significant risks and
rewards of ownership have been transferred from the seller to the buyer and therefore the
risks and rewards are generally assumed to be transferred on delivery of the goods.
However assuming that the goods had been sent before year-end, but only arrived after
year-end, whether or not the sale was made on a FOB or CIF basis would then become
relevant. If the goods were transported to the buyer on a F.O.B. basis (free-on-board), as
the goods are packed on board the ship, they become the property of the buyer. If the
goods are shipped C.I.F. (customs, insurance and freight), the seller undertakes to ensure
that the goods arrive intact. The question did not specify which method was adopted, so
the assumption must be that the goods were shipped C.I.F. and that the risks and rewards
are only transferred on the date of delivery. Therefore, no revenue should be recognised
until after year-end.
Kolitz & Sowden-Service, 2009
Chapter 4: Page 1
Revenue
Solution 4.1 continued

h) In a lay-by sale (otherwise known as a lay-away sale), the goods are retained in the
possession of the seller until such time as the last payment is made by the buyer It differs
from an instalment sale in that there is no financing aspect included in this transaction and
the customer is not legally obliged to purchase the goods. Therefore, revenue is generally
recognised after the final payment is received and the relevant goods are on hand and
ready to be delivered. However, if past experience indicates that most lay-by sales are
successfully concluded, then the revenue may be recognised once a significant portion of
the sales amount has been received by the seller.
i)
A bill and hold sale involves a customer purchasing an item that is to be delivered or
collected some time in the future. The revenue from such a sale may only be recognised
when the customer has been invoiced, the goods are ready for delivery and it is probable
that the delivery will take place.
j)
This is a normal sale (not a bill and hold) since the delay was not requested by the
customer. The sale may therefore be recognised only once the goods are delivered, (on
3rd March), being the date upon which the risks and rewards are transferred and
managerial control and effective management ceases.
k) Revenue from a sale that has gone bad should still be shown as revenue on the date that
the sale took place, with the amount considered unrecoverable shown separately as an
expense (bad debt expense).
Chapter 4: Page 2
Revenue
Solution 4.2
Debit
Credit
Mr. Schumi: Cash discount

2 January 20X7
Bank
200 000 x 90%
Sales income
Cash sale to Schumi (less 10% cash discount)
180 000
180 000
Mr. Frank: Trade discount and cash discount

1 February 20X7
Bank
100 000 x 3 x 90% x 90%
Sales income
Cash sale to Frank (less 10% trade and 10% cash discount)
243 000
243 000
Mr. Alonzi: Settlement discount

1 March 20X7
Accounts receivable
Given
Finance income allowance
150 000 x 5%
Sales income
150 000 x 95%
Credit sale to Alonzi (less 5% early settlement discount)
30 March 20X7
Bank
150 000 x 95%
Accounts receivable
Finance income allowance
Receipt from Alonzi within settlement period
150 000
7 500
142 500
142 500
150 000
7 500
Ms Haki: Sale on normal credit terms *

1 April 20X7
Accounts receivable
Sales income
Credit sale to Haki
31 May 20X7
Bank
Accounts receivable
Receipt from Haki
Given
400 000
400 000
Given
400 000
400 000
Mr. Rory: Rebate against expenses *

1 May 20X7
Accounts receivable
10 x 100 000 x 90%
Sales income
10 x 100 000 x 100%
Rebate expense
10 x 100 000 x 10%
Credit sale to Rory less 10% rebate against customer selling
costs
30 June 20X7
Bank
Accounts receivable
Receipt from Rory
900 000
1 000 000
100 000
900 000
900 000
Chapter 4: Page 3
Revenue

Debit
Credit
Mr. Burn: Rebate against selling price *

1 June 20X7
Accounts receivable
10 x 100 000 x 90%
Sales income
Credit sale to Burn less 10% rebate against selling price
900 000
900 000
31 July 20X7
Bank
Accounts receivable
Receipt from Burn
900 000
900 000
Mr. Mechanic: Sale on extended credit term *

1 July 20X7
Accounts receivable
Sales income
Sale on extended credit terms to Mechanic
450 000
450 000
31 August 20X7
Accounts receivable
W1: 32 946 x 2 / 12
Interest income
Interest income on sale on extended credit terms to Mechanic
W1: effective interest table

Inception
End of year 1
End of year 2
Interest
income
7.32125%
32 946
17 054
50 000
5 491
5 491
Instalment
received
(250 000)
(250 000)
(500 000)
Accounts receivable
balance
450 000
232 946
0
Chapter 4: Page 4
Revenue
Solution 4.3
Transaction number 1:
Debit
Credit
10 January 20X7
Debtors
160 000
Revenue: sales
Unearned finance income
Recognition of sale of goods
144 535
15 465
Cost of sales
Inventory
Cost of goods sold
85 000
85 000
10 June 20X7
Bank
Debtors
Payment received from debtor
160 000
160 000
Unearned finance income

Revenue: finance income
Recognition of finance income
15 465
15 465
Transaction number 2:
10 January 20X7
Bank
Revenue received in advance NOTE 1
Recognition of revenue received in advance
150 000
Cost of sales
Inventory
Cost of goods sold
76 000
150 000
76 000
10 October 20X7
Revenue received in advance
Revenue: sales
150 000
150 000
Recognition of sale of goods

Bank
Deferred income
150 000 x 3.5% x 9/12
Recognition of deferred interest income until conditions met

Deferred income
Revenue: interest income
3 938
3 938
3 938
3 938
Recognition of interest income once conditions met

Note 1: IAS 18.17 considers that only an insignificant risk of ownership is retained if a sale is made
with a warranty attached, in which case the recognition criteria would be met and the revenue would be
recognized. However, the same paragraph (IAS 18.17) states that if a reliable estimate of the provision
for warranty is not possible, then the revenue may not be recognized. Since the company had no
experience with such warranties, a reliable estimate of the provision for warranties was not possible
and therefore the revenue is not able to be recognized.
Chapter 4: Page 5
Revenue
Solution 4.4
a) Discussion: recognition and measurement
Introduction
The receipt of the C225 000 represents revenue from services rendered. This revenue may
only be recognised if all the criteria below are met.
Discussion: recognition of revenue
The amount of revenue can be reliably measured:

The amount of revenue is C225 000 being the cash value of the maintenance plan.
It is probable that the future economic benefits will flow:

The full C225 000 has been received in advance and therefore probability is assured.
Stage of completion can be measured reliably:

Although the stage of completion cannot be determined accurately, it is possible to make
a reliable estimate thereof.
There are three methods to choose from when estimating the stage of completion:
Costs to date method
Number of services method
Surveys method (work certified method).
Since we do not know how many services will be required, the number of services
method is not appropriate. Similarly, since we have not been provided with work
certified by a surveyor (and such certification would be unlikely given the unspecified
nature of the work to be performed), the surveys method would be inappropriate. We do
have the costs incurred to date and the total expected costs for the contract and therefore
this method would be the most appropriate. The reliability of these estimates is enhanced
given that Marks Maintenance Men has 10 years of experience to draw on when making
these estimates.
Cost incurred and to be incurred can be reliably measured:

Costs already incurred are reliably measured (by their very nature) and the future costs
may be reliably estimated since Marks Maintenance Men Ltd has 10 years experience to
draw on in making these estimates.
Conclusion: recognition of revenue

Revenue from the maintenance contract may be recognised on a percentage completion basis
over the 3-year period of the contract.
Chapter 4: Page 6
Revenue

a) Discussion: recognition and measurement continued
Discussion: measurement of revenue
The receipt of the C225 000 met the criteria for recognition as revenue. The revenue must
recognised over the three-year period of the contract based on the percentage completion.
The method used to determine the percentage completion must be the costs method.
W1. Estimated stage of completion: services performed
Costs incurred to date (to date!)
20X3: Given
20X3
20X4
20X5
30 000
75 000
150 000
150 000
150 000
150 000
20%
50%
100%
20X4
20X5
45 000
112 500
225 000
(0)
45 000
(45 000)
67 500
(112 500)
112 500
20X4: 30 000 + 45 000

20X5: 75 000 + 75 000
Total expected costs
Given
Percentage completion to date
20X3: 30 000 / 150 000

20X4: 75 000 / 150 000
20X5: 150 000 / 150 000
W2. Revenue recognised based on stage of completion

Revenue recognised to date
225 000 x 20%
20X3
225 000 x 50%

225 000 x 100%
Less revenue recognised in prior years

Revenue to be recognised in current year
W3. Alternative calculation (instead of W1 and W2):
(costs incurred in CY + costs incurred in PYs) / total expected costs x total revenue revenue recognised in PYs
20X3: (30 000 + 0) / 150 000 x 225 000 0 = 45 000

20X4: (45 000 + 30 000) / 150 000 x 225 000 45 000 = 67 500
20X5: (75 000 + 75 000) / 150 000 x 225 000 45 000 67 500 = 112 500
For your information:

Please note that, technically speaking, receiving revenue at the beginning of the transaction period
(upfront) leads to the receipt of finance and therefore interest expense should be recognised. The effect
of this financing was given to be immaterial and therefore this complication has been ignored.
If the cash were to have been received at the end of 20X5, this transaction would have involved revenue
from services and revenue from interest.
Chapter 4: Page 7
Revenue

b) Journals
Debit
Credit
20X3 Journals
Bank
225 000
Revenue
45 000
180 000
Amount received in 20X3

Costs
XXX
Creditor/ bank
XXX
Costs incurred in 20X3

20X4 Journals
67 500
Revenue
67 500
Revenue recognised in 20X4

Costs
XXX
Creditor/ bank
XXX

20X5 Journals
112 500
Revenue
112 500
Revenue recognised in 20X5

Costs
Creditor/ bank
XXX
XXX
Chapter 4: Page 8
Revenue
Solution 4.5
a) Discussion
Revenue: general discussion
Revenue is defined as the gross inflow of economic benefits during the period, arising in
the course of ordinary activities of an entity, that result in increases in equity, other than
increases relating to equity participants.
Revenue includes transactions and events relating to

the sale of goods,(the sale of the clusters, sale of the produce and curios)
the rendering of services,(fees from grape tasting)
interest, royalties and dividends (interest on the deposits)
Amounts collected on behalf of third parties, such as VAT are not economic benefits
that flow to the entity and do not increase equity, and are excluded from revenue
Therefore, the VAT on the sale of the clusters, from the grape tasting and the sale of
the curios must be excluded
Revenue should be measured at the fair value of the consideration received or receivable.
The recognition criteria are applied separately to each transaction.

Revenue from the sale of goods
Revenue from the sale of goods should be recognised when all the following conditions have
been satisfied:
(a)
the entity has transferred to the buyer the significant risks and rewards of ownership
of the goods;
(b)
the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
(c)
the amount of revenue can be measured reliably;
(d)
it is probable that the economic benefits associated with the transaction will flow to
the entity; and
(e)
the costs incurred or to be incurred in respect of the transaction can be measured

reliably.
Sale of clusters to buyers

The 150 clusters:
The revenue is reliably measured at C25 000 000 (C28 500 000 X 100/114).
It is reasonable to assume that the cost to build each home is reliably measurable.
The significant risks and rewards of ownership were transferred and managerial
involvement and effective control ceased when legal title was transferred.
Since transfer is usually only registered after payment has been effected, the flow of
future economic benefits has probably already occurred (and there is no evidence to
suggest that the inflow of economic benefits is not probable).
The revenue from these sales may therefore be recognised.
Chapter 4: Page 9
Revenue

a) continued
The 25 clusters:
The revenue is reliably measured at C5 000 000 (excluding VAT)
It is reasonable to assume that the cost to build each home is reliably measurable.
The significant risks and rewards of ownership have not yet been transferred and
managerial involvement and effective control has not yet ceased since legal title has
not yet transferred.
Since only deposits have been received to date and since sales are generally made
after bond approval, the inflow of economic benefits are not yet probable.
We can therefore only include the C25 000 000 in revenue for the current financial year in
question (the C5 000 000 received will have to be recognised as a deposit liability).
Sales of curios to customers
The revenue is reliably measured at C75 000 (C85 500 X 100/114).

The cost of the curios is reliably measurable at C38 500: invoiced price of C50 000
C1 500 (stolen) C10 000 (unsold stock on hand at year-end).
The significant risks and rewards of ownership were transferred and managerial
involvement and effective control ceased when the curios were sold and taken by the
customers.
Since curios are normally sold on a cash basis and since there is no information
provided to the contrary, it is safe to assume that the inflow of future economic
benefits are probable.
Revenue of C75 000 from these sales may therefore be recognised.
Sale of produce
The revenue is reliably measured at C2 500 000 (excluding VAT).

The cost of the transaction would include the commission, which is reliably
measurable at 10% of the selling price: 10% x 2 500 000 = 250 000; the cost would
also include the cost of the actual produce sold, which it is safe to assume would be
reliably measurable by Burnt Limited.
The significant risks and rewards of ownership would be transferred and managerial
involvement and effective control would cease when the produce was sold and taken
by the customers.
Since there is no information provided to the contrary, it is safe to assume that the
inflow of future economic benefits is probable.
Revenue should therefore be recognised at an amount of C2 500 000 (net of VAT). The
commission paid to the shopkeeper would be regarded as an expense, and not a reduction
in revenue.
Revenue from the rendering of services
When the outcome of a transaction involving the rendering of services can be estimated
reliably, revenue associated with the transaction should be recognised by reference to the
stage of completion of the transaction at the the end of the reporting period. The outcome of a
transaction can be estimated reliably when all the following conditions are satisfied:
Chapter 4: Page 10
Revenue

a) continued
(a) the amount of revenue can be measured reliably;
(b) it is probable that the economic benefits associated with the transaction will flow to the
entity;
(c) the stage of completion of the transaction at the end of the reporting period can be
measured reliably; and
(d) the costs incurred for the transaction and the costs to complete the transaction can be
measured reliably.
Fees from gape tasting
The revenue is reliably measured at C130 000 (C148 200 X 100/114).

It is safe to assume that the cost of the grape tasted would be reliably measurable by
Burnt Limited.
Given the nature of grape tasting, the stage of completion would always be
complete
The flow of future economic benefits are probable since grape tasting would normally
be paid for at the time of tasting (and no evidence has been provided to suggest that
the inflow is not probable).
Revenue should be recognised at an amount of C130 000.

Revenue from the use by others of an entitys assets (interest)
Revenue arising from the use by others of entity assets yielding interest, royalties and
dividends should be recognised when:
(a) it is probable that the economic benefits associated with the transaction will flow to the
entity; and
(b) the amount of the revenue can be measured reliably.
Interest
Interest should be recognised on a time proportion basis that takes into account the effective
yield on the asset
Revenue from interest amounting to C2 500 will be included. In this instance only 50% of the
interest for the two months accrues to Burnt Limited, as the other 50% will be paid to the
purchaser on transfer of the property (C250 000 x 12% x 2/12 x 50%).
b) Revenue note disclosure
BURNT LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 20X4
C
8. Revenue
Sales to customers
Sales from services rendered
Interest received
Total revenue
(28 500 000 x 100/114 + 85 500 x 100/114 + 2 500 000)

(148 200 X 100/114)
(250 000 x 12% x 2/12 x 50%)
27 575 000
130 000
27 705 000
2 500
27 707 500
Chapter 4: Page 11
Revenue
Solution 4.6
Recognition of revenue from sale of consignment stock
Revenue from the sale of goods may only be recognised when all of the following criteria are
met:
Significant risks and rewards of ownership are transferred from seller to buyer: although
the rewards of ownership have been transferred to Gareth Ltd to the full extent of the
C500 000 consignment sales made during the year, (since the profit on the future sale
thereof will vest in Gareth Ltd), the risks of ownership remain with Mitch Ltd in respect
of the C200 000 of the consignment sales that have not yet been sold at year-end (the
goods will ultimately be returned to Mitch Ltd if they are not sold by Gareth Ltd).
Seller retains neither continuing managerial involvement nor effective control over the
goods sold: not met since Mitch Ltd dictates the retail selling price of the goods remaining
in Gareth Ltds shop, worth C200 000
Amount of revenue can be reliably measured: this criteria is met since the consignment
sales price was set at C500 000.
Costs incurred and to be incurred can be reliably measured: the goods have already been
manufactured and therefore the cost thereof would be known to Mitch Ltd.
Probable that future economic benefits will flow to the seller: past experience seems to
suggest that the consignment stock sold to Gareth Ltd will be sold to the public at which
point Gareth Ltd will owe Mitch Ltd the consignment sales price, (there is no evidence
that Gareth Ltd is a bad debt), and therefore, it could be argued that this criteria is met.
Conclusion
Only C300 000 of the consignment sales should be recognised as revenue, since not all
recognition criteria for the C200 000 sales have been met.
Chapter 4: Page 12
Revenue
Solution 4.7
Revenue from services rendered: estate agents commission
The estate agency has provided a service to the seller (Mr. Caveman) in finding a buyer for his
property. The reward for this is the commission. Revenue from services rendered may be
recognised when:
The amount of revenue can be reliably measured:

The commission is reliably measured at C14 000.
The costs incurred to date and the costs expected to be incurred to complete the contract
can be reliably measured:
The costs incurred to date, it is assumed, may be reliably measured. In the case of an
estate agency, most legal costs are borne by the seller (or purchaser in certain instances)
and the costs of finding a buyer, in terms of petrol and vehicle maintenance costs, are
borne by the individual estate agent rather than the estate agency. The costs incurred by
an estate agency would therefore be of a general administrative nature (electricity,
telephone, rental of premises etc) and include the percentage commission payable to the
agent responsible for the sale (in this case C8 000).
The stage of completion can be reliably measured:

The mandate was to find a purchaser and although this appears to have been achieved, the
purchaser is not a confirmed purchaser until the expiry of the 3-month cooling off period.
This criteria, it is argued, is not met.
It is probable that the future economic benefits will flow to the entity:
The commission will only be probable once the 3-month cooling off period has expired
and the purchaser has not backed out of the offer. Once this has happened, a firm of
lawyers will deduct the commission from the funds collected from the purchaser on
behalf of the seller and pay this over to the estate agency and therefore there would
seldom be a bad debt.
Conclusion:
The commission of C14 000 should be recognised as revenue only once the 3-month cooling off
period has expired and the purchaser has not backed out of the offer. No revenue should,
therefore, be recognised in 20X3.
Chapter 4: Page 13
Revenue
Solution 4.8
a) Discussion
Introduction:
This contract involves revenue from services rendered. Interest has been ignored on the basis
that the contract period appears to be relatively short since three of the fifteen floors were
completed within one month and these were the worst floors, suggesting that the entire
contract will be completed very soon. Furthermore, no information has been provided when the
contract price is to be paid: upfront (which would lead to interest expense for Jillianne Limited),
at the end of the contract (which would lead to interest revenue) or piecemeal during the
contract (which would probable not result in interest of any kind).
Recognition criteria for revenue from services rendered:
Revenue from services rendered should be recognised when all the following criteria are met:
Revenue can be reliably measured
The inflow of economic benefits is probable
The stage of completion is reliably measurable.
Costs can be reliably measured
The stage of completion can be measured using:
Costs to date as a percentage of total costs to date;
Work certified as a percentage of total contract price; or
Physical inspection method.
Discussion:
The revenue can be reliably measured since the contract price has been fixed at C30 000.
The costs can be reliably measured since this has already been estimated based on past
experience to be C18 000.
The inflow is probable since Jillianne Ltd had many previous dealings with the hotel.
The stage of completion can be reliably measured based on costs to date as a percentage
of total costs to date: C6 000 / C18 000 = 33%
The physical inspection approach using 3 floors/ 15 floors (20%) would not be the most
appropriate since the 3 floors include the hotels most damaged furniture and thus the
company has done more than the 20% of the work to date. Similarly, the work certified
method would obviously not be appropriate since not certifications have been provided.
Conclusion:
Therefore, 33% x C30 000 = C10 000 should be recognised as revenue in the statement of
comprehensive income of Jillianne Ltd for the year ended 31 December 20X4.
b) Journals
20X4 Journals
Debit
Credit
31 December 20X4
Cost of services rendered
6 000
Bank/ Creditor
6 000
Cost of re-upholstery: first 3 floors of hotel

31 December 20X4
Debtor
Revenue from services rendered
10 000
10 000
Revenue from re-upholstery: first 3 floors of hotel:6 000 / 18 000 x 30 000
Chapter 4: Page 14
Revenue
Solution 4.9
a) Discussion
Introduction
The issues to be discussed include the recognition and measurement of revenue, of which
there are two types within the one sale agreement: sales revenue and interest revenue.
Sales revenue:
Recognition criteria:
The significant risks and rewards associated with ownership have been transferred from
the seller to the buyer;
Managerial involvement to the extent normally associated with ownership of an asset
must have ceased, as should the effective control thereof;
Revenue is reliably measurable;
Costs related to the sale are reliably measurable; and
It is probable that future economic benefits resulting from the sale will flow to the entity.
Discussion:
The significant risks have been transferred from seller to buyer since Outdoors Limited
(the buyer) is responsible for the insurance and transport as of 1 March 20X5; the rewards
have been transferred from Caravan Limited to Outdoors Limited since Caravan Limited
no longer has physical or legal possession of the caravans whereas Outdoors Limited now
does.
Managerial involvement and effective control by Caravan Limited has ceased evidenced
by the fact that Caravan Limited has no physical control over the inventory and is no
longer financially involved in the insurance thereof.
Revenue is reliably measurable at the cash cost per caravan (net of the trade discount):
C50 000 x 10 caravans = C500 000
Costs are reliably measurable using a mark-up of 30% on cost: C58 500 / 130 x 100 =
C45 000
The recognition criteria for the recognition of revenue from the sale of the caravans are
therefore all met on 1 March 20X5 and therefore revenue of C500 000 must be recognised on
1 March 20X5.
Interest revenue:
Since the caravans were sold on an instalment basis, there is effectively an interest revenue
component to this transaction. The amount owing in respect of the sale on 1 March 20X5 is
C500 000 and yet only C100 000 was received on this day. This means that the balance of
C400 000 was effectively financed.
Interest revenue is recognised and measured using the effective interest rate method,
apportioned on a time basis.
The interest rate used by Caravans Limited is 15%. The interest revenue to be recognised
each year can therefore be calculated as follows:
Chapter 4: Page 15
Revenue

a) continued
W1: Effective interest rate table:
1 March 20X5
28 February 20X6
28 February 20X7
O/bal
500 000
400 000
260 000
Interest
60 000
39 000
99 000
Bank
(100 000)
(200 000)
(299 000)
(599 000)
C/bal
400 000
260 000
0
W2: Time apportionment:

20X5
Interest income: 60 000 x 10/12 = 50 000
20X6
Interest income first 2 months: 60 000 x 2/12 = 10 000
Interest income next 10 months: 39 000 x 10/12 = 32 500
Total = 10 000 + 32 500 = 42 500
20X7
Interest income first 2 months: 39 000 x 2/12 = 6 500
Chapter 4: Page 16
Revenue

b) Journals
Debit
Journals for year ended 31 December 20X5
1 March 20X5
Debtor
Sales revenue
Recognition of sale of 10 caravans at 50 000 each
1 March 20X5
Cost of sales
Inventory
Cost of 10 caravans sold: 58 500 / 1.3 x 10 caravans
1 March 20X5
Bank
Debtors
Receipt of deposit
31 December 20X5
Debtors
Interest revenue
Interest income: for calculations, see part (a): W2: 20X5
Journals for year ended 31 December 20X6
28 February 20X6
Bank
Debtors
Receipt of instalment
31 December 20X6
Debtors
Interest revenue
Journals for year ended 31 December 20X7 (not required)
28 February 20X7
Debtors
Interest revenue
28 February 20X7
Bank
Debtors
Receipt of instalment
Credit
500 000
500 000
450 000
450 000
100 000
100 000
50 000
50 000
200 000
200 000
42 500
42 500
6 500
6 500
299 000
299 000
Chapter 4: Page 17
Revenue
Solution 4.10
W1: Effective interest rate table
1 January 20X6
31 December 20X6
31 December 20X7
31 December 20X8
Interest
income
10%
2 152 817
1 428 099
690 909
4 271 824
Service
income
600 000
1 200 000
2 400 000
4 200 000
Instalment
received
(10 000 000)
(10 000 000)
(10 000 000)
(30 000 000)
Debit
1 December 20X6
Debtor
Sales
Sale of 10 vehicles
2 152 817 x 10 customers
31 December 20X6
Debtor
Interest income
W1
Service income
50 000 x 120% x 10
Interest income and service income earned
Bank
(1 000 000 x 10)

Debtor
Receipt of instalment from debtors (10 customers)
31 December 20X7
Debtor
Interest income
W1
Service income
100 000 x 120% x 10
Bank
(1 000 000 x 10)

Debtor
31 December 20X8
Debtor
Interest income
W1
Service income
200 000 x 120% x 10
Bank (1 000 000 x 10)
Debtor
Debtor
balance
21 528 170
14 280 987
6 909 086
(6)
Rounding error
Credit
21 528 170
21 528 170
2 752 817
2 152 817
600 000
10 000 000
10 000 000
2 628 099
1 428 099
1 200 000
10 000 000
10 000 000
3 090 909
690 909
2 400 000
10 000 000
10 000 000
Chapter 4: Page 18
Revenue
Solution 4.11
a) Discussion
Introduction:
This transaction involves two types of revenue:
Revenue from the sale of goods
Interest revenue
Discussion: revenue from sale of goods
The revenue from the sale of the machine may only be recognised when all the following
criteria are met:
The significant risks and rewards of ownership are transferred to the buyer.
The significant risks and rewards are transferred on the date of delivery: 30 November 20X3,
when the risks are transferred to the buyer (costs of insurance, maintenance and repairs were
then for the account of the customer) and all rewards from the use of the machine will be
earned by the buyer. Although the buyer requested that the machine be delivered as soon as
possible, the delivery was delayed since the required factory machine was not in stock and
due to inefficiencies in the ordering system.
The entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold.
Managerial involvement and effective control by Roger Ltd ceased on 30 November 20X3
when delivery was accepted by the customer and the insurance over the machine was
cancelled.
The amount of revenue can be reliably measured
The revenue from the sale is the fair value being the net cash selling price that was agreed to
at the time of the transaction: C240 000 C40 000 = C200 000
It is probable that the economic benefits associated with the transaction will flow to the
entity.
No evidence has been given to suggest that the customer may be a bad debt and furthermore,
the customer is one of Roger Ltds regular customers and therefore we can assume the inflow
of future economic benefits to be probable.
The costs incurred or to be incurred in respect of the transaction can be reliably measured.
The cost of the machine may be reliably measured based on the invoice price converted
into the local currency plus all related and necessary costs of transport and insurance from
the date of purchase from the foreign supplier to the date on which it became available for
sale locally: C150 000 + C20 000 = C170 000.
Discussion: revenue from interest
Interest revenue should be recognised using the effective interest rate method over the period
that the finance is offered. The interest may be calculated as follows:
Year
Opening balance Interest (at 12.937%) Instalment (given) Closing balance
31/11/X4
200 000
25 874
(20 000)
205 874
31/11/X5
205 874
26 634
(20 000)
212 508
31/11/X6
212 508
27 492
(240 000)
0
80 000
280 000
The interest should be recognised as follows, measured on a proportionate time basis:
31/12/20X3: C25 874 x 1/12 = C2 156

31/12/20X4: C25 874 x 11/12 + C26 634 x 1/12 = C25 937
31/12/20X5: C26 634 x 11/12 + C27 492 x 1/12 = C26 705
31/12/20X6: C27 492x 11/12 = C25 202
Chapter 4: Page 19
Revenue

a) continued
Conclusion:
The revenue from the sale of the machine of C200 000 should be recognised on the date of the
delivery, that is, 30 November 20X3 whereas the interest should be recognised over the three
year period of the financing with C2 156 recognised in 20X3 and C25 937 in 20X4.
20X4 Journals are overleaf
Chapter 4: Page 20
Revenue

b) Journals
20X3 Journals
Debit
Credit
9 October 20X3
Inventory
150 000
Foreign creditor
150 000
Purchase of a machine: risks and rewards transferred to Roger Ltd on 9 October

Evidenced by: taking out insurance over goods purchased from this date
1 November 20X3
Inventory
20 000
Foreign creditor
20 000
Costs relating to purchase of machine shipped to Roger Ltds premises

Purchase recognised on arrival of goods at Roger Ltds premises
30 November 20X3
Cost of transport and insurance expense
10 000
Foreign creditor
10 000
Cost of shipping the machine to the customer (selling cost):

The date of sale is 30 November since the delay was our fault. if the delay had been
at the customers request, the date of sale would have been 1/11
Debtor
200 000
Sale
200 000
Sale of a machine (net of discounts: 240 000 40 000)
Cost of sales
170 000
Inventory
170 000
Cost of sale: 150 000 + 20 000 = 170 000
15 December 20X3
Foreign creditor
180 000
Bank
180 000
Foreign creditor paid
31 December 20X3
Debtor
(25 874 x 1/12)
2 156
Interest
2 156
Interest earned on debtors balance
Tax
Current tax payable
6 647
6 647
Tax on sale and interest less costs incurred:

(200 000 + 2 156 170 000 10 000) x 30%
Chapter 4: Page 21
Revenue

b) Journals continued
20X4 Journals
Debit
Credit
30 November 20X4
Bank
20 000
Debtor
20 000
First instalment received

31 December 20X4
Debtor
25 937
Interest
25 937
Interest earned on debtors balance (25 874 x 11/12) + (26 634 x 1/12)
Tax
7 781
Current tax payable
7 781
Tax on interest earned on interest income: 25 937 x 30%
c) Disclosure
ROGER LTD
EXTRACTS FROM STATEMENT OF COMPREHENSIVE INCOME
20X3
Note
C
Revenue from sales
320 000
(50 000 + 170 000)
Cost of sales
(220 000)
Gross profit
100 000
(80 000 + 60 000 + 92 156 +
Other income
242 156
10 000)
(80 000 + 60 000 + 100 000 + 20
000)
(60 000 + 10 000)
(just the finance charges incurred)
Other costs
Finance charges
Profit before tax
(40 000 + 6 647)
Income tax expense
Other
comprehensive
income
Total
comprehensive
income
20X2
C
100 000
(60 000)
40 000
260 000
(70 000)
(100 000)
172 156
(46 647)
125 509
-
(50 000)
(110 000)
140 000
(40 000)
100 000
-
125 509
100 000
Chapter 4: Page 22
Revenue
Solution 4.12
a)
Introduction and recognition criteria: sale of prepaid vouchers
The recognition criteria relating to revenue from the sale of goods (per IAS 18), given below,
needs to be considered:
The significant risks and rewards of ownership are transferred to the buyer.
The entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold.
The amount of revenue can be reliably measured
It is probable that the economic benefits associated with the transaction will flow to the
entity.
The costs incurred or to be incurred in respect of the transaction can be reliably measured.
Discussion
The revenue is reliably measured: C30 000.

The flow of economic benefits is probable: the cash has already been received.
In the case of the unredeemed gift vouchers:
the revenue is reliably measured: C2 000
since the recipient of the certificate has not yet exchanged it for merchandise the cost of
the merchandise is not known;
since the C2 000 vouchers have not been exchanged for goods, these goods are still in
the possession of the seller, and therefore the risks and rewards have not yet
transferred from the seller to the buyer and managerial involvement and effective
control would also not have ceased.
In the case of the redeemed vouchers:
the revenue is reliably measured: C28 000
since the recipient of the certificate has already exchanged it for merchandise the cost of
the merchandise would be known;
since the vouchers to the value of C28 000 have already been exchanged for goods,
the risks and rewards thereof have been transferred and managerial involvement and
effective control would also have ceased.
Therefore, only the C28 000 in respect of redeemed vouchers may be recognised; the C2 000
received should be treated as a liability since it is a present obligation to a potential customer. The
critical event relative to the recognition of the liability is the supply of the merchandise selected by
the customer.
It should be noted that the assumption was made that the certificate could neither be
converted into cash nor set-off against an outstanding amount.
b)
If the vouchers had expiry dates, the value of the expired vouchers would be recognised as
revenue on expiry date, whereupon the cost of the merchandise would be zero. Until such
time as the vouchers are recognised as revenue, they would be recognised as liabilities
(income received in advance).
Chapter 4: Page 23
Revenue
Solution 4.13
Part A: Instalment sale
An installment sale involves two transactions:
the sale and
the financing of the sale.
An installment obligates the purchaser to complete all the payments since the purchaser has taken
possession of the goods.
The revenue from the installment sale (C1 000 x 5 interest revenue) may be recognised in the
financial statements of Battleship Gallactica Limited when all of the recognition criteria have been
met. The recognition criteria are met when:
the significant risks and rewards of ownership have passed to the buyer: since the goods have
been delivered, the risks and rewards have obviously passed;
managerial involvement to the extent normally associated with ownership and effective
control over the goods ceases: since the goods have been delivered, managerial involvement
has ceased;
the revenue can be reliably measured: C5 000 interest calculated on the effective interest
rate method;
the costs are reliably measurable: using either the supplier invoice or working back from the
selling price to the cost price by using either the entitys gross profit percentage or mark up;
and
it is probable that the economic benefits associated with the transaction will flow to the entity:
no evidence to the contrary was provided.
The interest element included in the installments should be recognised over the period of the
installment sale contract using the effective interest rate method.
Part B: Lay away sale

A lay away sale does not involve financing and, since the goods are not collected by the purchaser
until all installments are paid, there is no obligation for the purchaser to complete all the payments.
The revenue from the lay away sale (C1 000 x 5) may be recognised in the financial statements of
Battleship Gallactica Limited when the goods are delivered. However, if experience indicates that
most such sales are consummated, revenue may be recognised when a significant deposit is
received provided the goods are on hand, identified and ready for delivery to the buyer.
Chapter 4: Page 24
Revenue
Solution 4.14
Introduction
Revenue is defined by IAS 18 as:
the gross inflows of economic benefits;

during the period;
arising in the course of ordinary activities of an entity;
when those inflows result in increases in equity,
other than increases relating to contributions from equity participants.
In terms of the contract C3 000 will be paid to Sporty Limited and meets the definition of
revenue in that:
the C3 000 is a gross inflow of economic benefits,

the amount will be received/receivable in the current period,
as a result of the ordinary activities of the gym (the gyms primary business is to provide
the client with gym facilities), and
the amount is not a contribution from the equity participants (not a sale of shares).
The selling of the gym contract should therefore be recognised as revenue in the financial
statements of Sporty Limited.
The sale of a gym contract must be assessed in order to determine if it is either:
A sale of goods;
Rendering of services; or
Royalties, interest or dividends.
The provision of gym facilities to gym members is a rendering of a service.

Revenue from the rendering of services is recognised when all the following criteria are met:
the revenue can be reliably measured;

the costs can be reliably measured (costs incurred to date and costs still to be incurred);
it is probable that the economic benefits expected will flow to the entity; and
the stage (percentage) of completion can be reliably measured.
A discussion of these recognition criteria is provided below:
The revenue is stated in the contract as C3 420. This amount includes VAT. The revenue
must be calculated as C3 420 x 100/114. The revenue is therefore reliably measurable at
C3 000, (with a VAT liability owing to the tax authority of C420).
Since the gym has been opened for eleven months, there is sufficient past experience
upon which to base a reliable estimate of the cost involved in providing these services.
Since the contract price is paid before the services are provided, the inflow of economic
benefits are not only probable but certain.
The stage of completion in this case is the most difficult to estimate. The following are
the three methods from which to choose:
surveys of work performed;
services already performed as a percentage of the total services to be performed; and
the costs incurred to date as a percentage of the total costs to be incurred.
Chapter 4: Page 25
Revenue

In the case of Sporty Limited none of the above methods would be appropriate. Although
research has proven that the contracts would be used 80% in the first year, 15% in the second
and 5% in the third year, the revenue should not be recognised in this pattern. Even if the
client does not utilise the gym in the second and third year, the gym would still be obliged to
make the service available to the user. According to IAS 18, when services are performed by
an indeterminate number of acts over a specified period of time, revenue is recognised on a
straight-line basis over the specified period unless there is evidence that some other method
better represents the stage of completion. When a specific act is much more significant than
any other acts, the recognition of revenue is postponed until the significant act is executed
(IAS 18, para 25). Since there is no one significant act, it would be appropriate to recognise
the revenue evenly over the period of the contract.
Conclusion
The amount received is therefore revenue received in advance and should initially be
recognised as a liability, and reversed evenly over the contract period to revenue: C1 000 per
year. Where the contract is sold during a year, the C1 000 would have to be calculated on a
pro-rata basis e.g. a sale on 1 October in the current year, would require the current year
revenue to include C1 000 x 3/12 = 250.
Chapter 4: Page 26
Revenue
Solution 4.15
a)
Warthogs Limited only retain an insignificant risk of ownership in that on average only
2% (2/100) of broomsticks are defective.
Warthogs is able to reliably/reasonable estimate repair and replacement costs thereby

warranting the recognition of revenue at the date of sale.
An appropriate provision for repairs/ replacements in terms of the warranty contract
should be recognised/raised at the date of sale.
It is probable that there will be an inflow of economic benefits in the form of sales
revenue (C750 per broomstick sold) which can be reliably measured in terms of the sales
agreement.
Warthogs is able to reliably measure the costs of each broomstick sold (C750/125% x
100% = C600).
Once the broomstick has been sold, Warthogs no longer has any managerial involvement
in the use of the broomstick.
Therefore, since the recognition criteria for a sale are all met, Warthogs Limited should
recognise revenue at the date of sale and recognise a warranty provision for the estimated
repair/ replacement costs.
b)
The installation of the air-conditioning unit constitutes a significant portion of the sales price:
The rewards of ownership have not been transferred to the buyer until the air-conditioning
unit has been installed and is operational at the buyers premises.
The revenue is able to be reliably measured as it is stipulated in the sale agreement and it
is probable that economic benefits will flow to the entity once the air-conditioning unit
has been successfully installed.
Warthogs Limited relinquishes managerial involvement in the air-conditioning unit only

once the unit has been installed.
The costs incurred by Warthogs to distribute and to install the unit can only be reliably
measured once the unit has been installed. (Or: a reliable estimate of the costs that will be
incurred by Warthogs Limited to distribute and install the unit is probably possible based
on past experience).
Therefore, since all the recognition criteria for the sale will only be met on installation of the
system, Warthogs Limited should only recognise revenue arising on the sale of an airconditioning unit, once installation is complete.
Chapter 4: Page 27
Revenue
Solution 4.15 continued . . .

c)
Prior to the purchaser being awarded the contract, Warthogs retains a significant portion
of the risks of ownership.
Although the sales amount can be reliably measured there is uncertainty at the date of the
sale surrounding the probability of the return (inflow of benefits) which is contingent on
the purchaser being awarded the contract. This could have an impact on the measurement
of the sales revenue if the contract is only awarded much later (i.e. the revenue may need
to be measured at the present values of future sales revenue).
Warthogs Limited will only relinquish managerial involvement in the lawnmower once
the purchaser has been awarded the gardening contract.
A reliable estimate of the cost of the lawnmower is probably possible based on past
experience.
Therefore, since all the recognition criteria for the sale will only be met when it is certain that
the purchaser will be granted the gardening contract, Warthogs Limited should only recognise
the revenue when it is certain that the purchaser will be granted the gardening contract.
d)
Since the newspapers have been sold on consignment and the number of newspaper sales
to the public is not predictable, Warthogs Limited has not transferred the risks of
ownership (i.e. the risk of the costs associated with producing the paper not being
recouped).
The amount of revenue can only be reliably measured once Warthogs knows the number
of newspapers sold.
Warthogs Limited will only relinquish managerial involvement in the newspapers once
they have been sold to the public (all unsold newspapers will be returned to the Warthogs
Limited).
A reliable estimate of the cost of the newspapers is probably possible based on past
experience.
Therefore, revenue should only be recognised when Warthogs is certain of the number of
papers sold on their behalf. Prior to this stage the probability of an inflow of benefits is
uncertain based on the unpredictability of newspaper sales.
Chapter 4: Page 28
Revenue
Solution 4.16
a)
In terms of IAS 18 Revenue, in order to reflect the substance of the transaction it may be
necessary to apply the recognition criteria to the separately identifiable components of a
single transaction. The sale of a Caris 1600, including service plan, to Mr Nick has two
separately identifiable components: one being the sale of the vehicle and the second being the
sale of a service plan. Each component needs to be discussed and recognised separately.
The sale of the motor vehicle:
In order for revenue to be recognised on the sale of the vehicle to Mr Nick, all of the
following conditions need to be met:
The significant risks and rewards of ownership must be transferred. The significant risks
and rewards of ownership are transferred to Mr Nick, the buyer on 1 April 20X6 when Mr
Nick takes delivery of the vehicle. From this date Mr Nick is responsible for insuring and
maintaining the vehicle and receives the rewards from the use of the vehicle.
No management involvement or control over the vehicle must exist. Jabulani Motors
retains neither continuing management involvement nor control over the vehicle once Mr
Nick has taken delivery of the vehicle: Jabulani Motors no longer has physical possession
of the vehicle and is no longer responsible for insuring the vehicle.
The amount of revenue must be able to be reliably measured. The amount of revenue can
be measured reliably as the price has been agreed to in Mr. Nicks signed offer to
purchase. The revenue attributable to the sale of the vehicle is C142 220 (C147 500
C5 280 NOTE 1 relating to the service plan see below for calculations).
The inflow of economic benefits must be probable. This criteria is met since Mr Nick has
entered into a loan agreement with Tafcat bank, which paid the full amount of C147 500
to Jabulani Motors on 1 April 20X6.
The costs incurred must be reliably measurable. The costs incurred in respect of the
transaction can be measured reliably since Jabulani Motors works on a standard 25%
gross profit percentage: C142 220/ 100% x 75% = C106 665
As all of the above conditions have been met Jabulani Motors Limited should recognise
revenue from vehicle sales of C142 220.
NOTE 1: The revenue from the services of 5 280 would normally have been present valued and then
this present value would have been deducted from the total price of 147 500. This was not done in this
question since the question indicated that discounting should be ignored.
The sale of the service plan:

In terms of IAS 18, the outcome of the sale of the service plan can be measured reliably when
all of the following conditions are met:
The amount of revenue must be able to be reliably measured. The amount of revenue can
be measured reliably as customers are usually charged C880 for a service and the plan
either covers 5 years or 90 000km. This means that, at most, 6 services (90 000km/
15 000km), would be performed. Therefore C5 280 (C880 x 6 services) of the total
selling price would be attributable to the service plan.
The inflow of economic benefits must be probable. It is probable that the economic
benefits associated with the transaction will flow to the entity, given that Jabulani Motors
received the full price of C147 500 (which includes the C5 280 for the services) from
Tafcat Bank on date of sale (i.e. 1 April 20X6).
The stage of completion must be able to be reliably measured. The stage of completion of
the transaction can be measured reliably at the end of the reporting period based on the
number of services performed to date as a percentage of 6 total services. Mr. Nicks first
service was performed in August 20X6, which means that at 30 September 20X6, the
percentage complete is 16.7% (or 1/6).
Chapter 4: Page 29
Revenue

a) continued
The costs incurred and the costs to complete the transaction must be reliably measurable.
The costs incurred for the transaction and the costs to complete the transaction can be
measured reliably as Jabulani Motors marks up the cost of parts and labour on services by
33 1/3% and the selling price (C880) of a service is known. This means that the cost of
the service must be C660 (880 / 133% x 100%), and to complete the remaining service
will cost, at most C3 300 (5 remaining services x 660).
Revenue in respect of the service plan must be measured using the percentage completion
method, using the number of services performed to date as an indicator of the percentage
completed. The revenue should therefore be recognised as follows:
The revenue for one service should be recognised in the financial statements at
30 September 20X6: C880 (5 280 x 1/6);
the balance of the service revenue must be deferred as a liability (and presented as a
current liability) until the remaining services have been performed or the 5 year period
has expired: C4 400 (5 remaining services x 880).
Note: the receipt of the 147 500 on date of sale, including an amount for services, suggests
that there is an element of financing and that interest expense should therefore be recognised.
The question has indicated that the effects of discounting should be ignored thus this
complication was ignored.
Chapter 4: Page 30
Revenue

b)
JABULANI MOTORS LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR YEAR ENDED 30 SEPTEMBER 20X6
Revenue
Cost of sales and services
Sales: C142 220 x 100 + Services: 70 400 (W1)

C14 222 000/ 100% x 75% +
C70 400/ 133.3% x 100%
Notes
3
C
14 292 400
10 719 300
W1: (5 280 x 100 x 20% x 1/6) + (5 280 x 100 x 30% x 2/6) and W2: 880 x 6 services = 5 280

EXTRACT FROM STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 20X6
C
EQUITY AND LIABILITIES
Current liabilities *
Service revenue received in advance
C5 280 x 100 70 400
457 600
* the services could be earned over a period of 5 years or could be earned over a shorter period if the
driver completes the 90 000 km maximum mileage before the 5 year limit. A more prudent approach would
be to assume that the liability is a current liability rather than a long-term liability.

EXTRACT FROM NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 SEPTEMBER 20X6
C
3.
Revenue
Revenue comprises:
Sales of motor vehicles
Servicing of motor vehicles
100 x 142 220

100 x 20% x 5 280 x 1/6 + 100 x 30% x 5 280 x 2 / 6
14 222 000
70 400
14 292 400
Chapter 4: Page 31
Revenue
Solution 4.17
a)
Introduction
The issue is whether the amounts received should be treated as revenue (income earned in the
current period) or as a liability (income received in advance). The nature of the revenue could
be seen as either a sale of goods (in this case the cards) or the rendering of a service. In this
case, it is argued that the most important/ significant aspect of the transaction is the rendering
of a service by Born 2 Speak rather than the sale of a mere plastic card.
The revenue recognisable must be subject to the recognition criteria in IAS 18, Revenue.
The recognition of a liability must be as per The Framework.
Revenue
Revenue is defined in IAS 18 as:
Gross inflows of economic benefits,
During the year,
Arising from ordinary activities,
Resulting in increases in equity other than an increase arising from contributions of equity
participants.
According to The Framework, income (including revenue) can only be recognised when the
increase in economic benefits:
is probable and
can be measured reliably.
Although there has legally/ technically been a 'sale', revenue will be recognised as 'revenue
from services' (since the resultant ability to use the card to make calls for 3 months, being a
provision of a service, is the most significant aspect to the 'sale' transaction). The revenue
from such 'sale' transactions must therefore be recognised based on the recognition criteria
relevant to 'provision of services' transactions.
As per IAS 18, the revenue should be measured by reference to the stage of completion, once
the outcome of the transaction can be estimated reliably.
The revenue recognition criteria for services rendered are as follows:
Revenue should be reliably measured
Revenue is measured in terms of the selling price per card (excluding VAT) multiplied by the
number of cards sold.
Probable that economic benefits will flow to the entity
Because the amount is paid in advance, the economic benefits have already flowed to the
entity.
Stage of completion must be reliably measured
This will relate to the extent to which users have utilised the services that they were entitled
to.
For Airtime cards, this can be calculated over the 3 month life.
For Call cards, this can be based on experience, past usage or a computerised check.
Chapter 4: Page 32
Revenue

a) continued
Reliable measurement of costs
It is reasonable to assume that the entity will be able to reliably measure the cost of its cards
and its services.
Liability
The portion of amounts received to date that relate to services not yet rendered, should be
recognised as a liability, being income received in advance.
A liability is defined in The Framework as:
A present obligation of the entity
As a result of a past event
That will result in the outflow of economic benefits.
For a liability to be recognised, The Framework sets out recognition criteria as follows:
the outflow of economic benefits must be probable; and
the cost should be measured reliably.
Discussion:
The obligation exists as the company has to provide services to the purchasers of the
cards.
The past event was the sale of the cards by the company which creates the obligation of
service.
The outflow of economic benefits will be in the form of resources used by the entity when
providing the service in respect of its obligations.
Reasonable to assume that outflow of benefits are probable and can be reliably measured.
Tax consequences assuming that income received in advance is taxed in the year of receipt
while accounted for in the books on an accrual basis, a temporary difference and therefore
deferred tax would arise on this transaction.
VAT consequence the VAT is received on behalf of the tax authorities and is thus not
included as part of the income.
Conclusion
The proceeds can be divided into revenue and a liability. The revenue is earned from the
rendering of a service and as a portion of the receipt complies with that definition, that portion
of the receipt should be recognised as revenue.
The accrual basis of accounting requires the recognition of the effects of transactions when
they occur (and to the period to which they relate) and not as cash is received or paid.
The portion of cash received for which a service is still to be rendered should therefore be
recognised as a liability: the entity has an obligation to provide a service in respect of the
coverage to be provided.
Chapter 4: Page 33
Revenue

b)
Bank/ Debtors (A)

Revenue (I)
Output VAT (L)
Cash received over the year
Commission expense
Input VAT (A)
Liability/ Bank
Cash paid over the year
Dr
15 686 400
Cr
(8 500 000 + 4 480 000)

(500 000 +280 000) (L)
(15 686 400 x 14/114)
12 980 000
780 000
1 926 400
(1 495 000 100 / 114)

(1 495 000 14 / 114)
(90 000 + 59 500) x 10
1 311 404
183 596
1 495 000
Workings
W1:
Number of cards sold
Amount sent to retailers
Unsold at retailers
Therefore, total cards sold to customers
W2:
Revenue generated by sales
Airtime
cards
90 000 x C114;
10 260 000 x 14/114;
10 260K 1 260K;
Call cards
59 500 x C91.20
5 426 400 x 14/114
5 426 400 666 400
Airtime cards
(units)
100 000
10 000
90 000
Total
receipts
(including
VAT)
10 260 000
VAT
liability
1 260 000
Total
revenue
9 000 000
5 426 400
666 400
4 760 000
15 686 400
1 926 400
Call cards
(units)
60 000
500
59 500
Revenue
Recognised
in 20X2
(a)
8 500 000
(b)
4 480 000
12 980 000
Revenue
received
in
advance
(L)
(a)
500 000
(b)
280 000
780 000
Airtime cards
Of the 90 000 airtime cards sold to customers, the entity still has to render services in respect of the
cards sold in November and December. Since research indicates that most sales occur at the beginning
of the month and that usage is constant over the three month service period, almost all airtime cards
sold in October would have expired by year end. The amount of service to be provided can be
calculated by dividing the number of cards by 3 to obtain a monthly figure based on the facts that sale
occurs at the beginning of the month and usage is even over the 3 months:
In respect of Novembers sales, only one month of service is owed as at December. This can be
calculated as: (3000/3) x 1 = 1 000.
In respect of December sales, two months service is owed at year end date. This can be calculated
as: (6000/3) x 2 = 4000
By adding the units of service owed, we come to a total of 5 000 units still owed at year end.
The sales of 90 000 cards should therefore be recognised as follows:
85 000 (90 000 5 000) cards should be recognised as revenue: C100 x 85 000 = C8 500 000;
5 000 cards should be recognised as a liability: C100 x 5 000 = C500 000.
Note: The unit price is taken excluding VAT: C100 = (C114 x 100/114)
Chapter 4: Page 34
Revenue

Workings continued
Call cards
Of the 59 500 cards sold, the entity is only liable to provide a service on 1 000 cards to the extent of
100% and 5 000 cards to the extent of 50%. Therefore in total, an obligation exists for 3 500 units:
[1 000 (1 000 x 100%) + 2 500 (5 000 x 50%)].
The sales of 59 500 cards should therefore be recognised as follows:
56 000 cards (59 500- 3 500) as revenue: C80 x 56 000 = C4 480 000;
3 500 cards as a liability at year-end: C80 x 3 500 = C280 000.
Note: The unit price is taken excluding VAT: C80 = (C91.20 x 100/114)
Summary
Airtime Cards
Call cards
100 000 10 000 = 90 000 x R100
60 000 500 = 59 500 x R80
85 000 x R100
R8 500 000
5000 x R100
R500 000
R9 000 000
56 000 x R80
R4 480 000
3 500 x R80
R280 000
R4 760 000
R9 000 000
R4 760 000
Chapter 4: Page 35
Revenue
Solution 4.18
a) Initial recognition and measurement
IFRIC 13 paragraph 5 states that paragraph 13 of IAS 18 must apply to the accounting of
loyalty points.
Loyalty points should be recognised as a separately identifiable component of the sales
transaction in which they are granted. The fair value of the consideration received or
receivable in respect of the initial sale shall be allocated between the award credits and the
other components of the sale. Therefore, the recognition of the C1 000 must be split into two
components, namely revenue attributable to the sale of the actual product and the revenue
attributable to the awarding of loyalty points.
Revenue relating to the sale of the goods
To recognise an amount of sales revenue, the criteria per IAS 18 for sales transactions must
be met:
The risks and rewards of ownership must pass to the customer. The entity immediately
transfers the good to the customer.
The entity must retain neither managerial involvement usually associated with ownership
nor effective control. The purchased goods are transferred to the customer on date of sale
and there is no indication that management has any further involvement with the goods.
The inflow of future economic benefits must be probable. All sales are cash sales and
therefore there is no risk that the inflow is not probable.
The amount of revenue can be reliably measured The components of the actual sale of
the product can be calculated by netting off the calculation of revenue attributable to the
loyalty points, from the total revenue of the sale.
The costs incurred/to be incurred must be reliably measurable. The costs appear to be
reliably measurable since the entity uses an efficient standard costing system.
The entity must recognise the revenue attributable to the sale of the product since all
recognition criteria are met.
The measurement of the revenue from the sale of the actual product is calculated as the
amount after deducting the revenue from the sale of the points. The revenue from the sale of
the points would be measured as follows:
Number of points x value per point = C1 000 / C10 x C1 = C100
The revenue from the sale of the actual goods is therefore measured as follows:
Total revenue revenue from sale of points = C1 000 C100 = C900.
Revenue attributable to the loyalty points.
IFRIC 13 states that if the entity supplies the awards itself (as in Naty Ltds case), it must
recognise the consideration allocated to award credits as revenue when awards credits are
redeemed and it fulfils its obligations to supply awards. The amount of revenue recognised is
based on the number of award credits that have been redeemed in exchange for awards,
relative to the total number expected to be redeemed.
Chapter 4: Page 36
Revenue

b) Journal entries for sale in part (a)
Debit
Credit
30 November 20X8
Bank
1 000
Revenue (actual sale of good)
900
Unearned income (loyalty award)
100
Initial recognition of the sale

Workings
Sale = C1 000
C10 = 1 loyalty point
Therefore C1 000 = 100 loyalty points
Therefore C100 of the sale is attributable to the loyalty award
Therefore C900 of the sale is attributable to the actual sale of the good.
c) Journal entries for 20X8

Debit
Credit
31 December 20X8
Revenue (loyalty award)
50 000
50 000
Recognition of revenue relating to the loyalty points redeemed

Workings
C1 000 000 total sales
C10 = 1 loyalty point
Therefore C1 000 000 = 100 000 loyalty points (1 000 000/100)
And 1 loyalty point has a FV of C1
Therefore 100 000 points = C100 000
Total points estimated to be redeemed = 80% = 0.8 x 100 000 = 80 000
Therefore % redeemed in 20X8 = 40 000/80 000 = 50%
Therefore total revenue recognised relating to loyalty points awarded =
0.5 x C100 000 = C50 000
Chapter 4: Page 37
Revenue

d) Journal entries for 20X9
20X9 Journals
Debit
Credit
31 December 20X9
40 000
Revenue (loyalty award)
40 000
Recognition of revenue relating to the loyalty points redeemed

Workings
Total points estimated to be redeemed = 90% = 0.9 x 100 000 = 90 000
Therefore % redeemed in 20X9 = 81 000/90 000 = 90%
{81 000 = 41 000 + 40 000}
Therefore total revenue recognised relating to loyalty points awarded =
0.9 x C100 000 = C90 000
But C50 000 was recognised in the 20X8 year
Therefore C40 000 should be recognised in the 20X9 year {90 000 50 000}
Chapter 4: Page 38
Revenue
Solution 4.19
All of the above scenarios deal with the sale of goods. From the information provided it is
clear to see that the both the criteria of reliably measuring cost (C12 000) and revenue
(C15 600) are met. The three scenarios below focus on the other criteria.
Customer A
The customer paid the amount in full and thus the flow of economic benefits is certain.
The customer also has taken delivery of the goods and rewards have transferred to him.
The issue, which requires special attention here, is the passing of the risks of ownership
and whether Retail Therapys management is still involved in the transaction.
IAS 18.16 provides examples of where significant risks may be retained by the entity.
One of the examples listed involves the presence of a warranty provision. IAS 18.17 explains
that revenue should be recognised if the risk of ownership is insignificant and that the risk is
insignificant if the seller can reliably estimate future returns and recognise a liability for
returns based on previous experience.
Retail Therapy should therefore recognise this revenue since:
A sale has been made with a warranty (being a risk that ownership will be retained), but
Past experience is available to draw on in order to reliably estimate the warranty
provision (therefore this risk of ownership being retained is deemed to be insignificant).
No provision would, however, be recognised in the case of customer A since past experience
indicates that this customer never returns goods and that goods are never faulty: therefore no
return is expected.
Customer B
The customer has taken delivery of the goods and thus risks and rewards have been
transferred to him, Retail Therapys management is also no longer involved and no longer
has effective control over the goods. Retail Therapy now has a right to receive payment
from customer B.
The issue that requires more deliberation is whether or not it is probable that the economic
benefits associated with the transaction will flow to Retail Therapy.
As the customer was known to have a criminal record for fraud and no creditworthiness test
was done, there is significant uncertainty that the future economic benefits will flow in. This
means that:
No asset may be recognised (the recognition criteria are not met); and
Revenue may not be recognised (the recognition criteria are not met).
For practical purposes though, a journal entry must be passed in order that a debtors
statement is generated from the accounting system (debtors statements are normally
automatically generated from the debtors account and therefore, if we do not debit this
account, no statement will be posted to the customer and therefore, would be failing as a
business to recover the money owed to it).
The following journal is suggested (the net effect is that the debtors balance in the statement
of financial position is nil and revenue is not recognised, thus complying with both the
Framework and IAS 18).
Chapter 4: Page 39
Revenue
Debtors
Unrecognisable debtors allowance (-ve asset)
Sale to customer B (fraud crime): uncertain inflow of
FEBs. Revenue to be recognised when received.
Debit
15 600
Credit
15 600
Customer C
The customer, at the time of the sale, was expected to fulfil his obligation to pay in full
based on the fact that he was a reliable and long standing customer and therefore the flow
of economic benefits was reasonably certain.
The customer had taken delivery of the goods and therefore risks and rewards had been
transferred.
It would thus have been appropriate, according to IAS18, to recognise revenue at this stage.
IAS 18.18 states that when an uncertainty arises about the collectibility of an amount already
included in revenue, this uncollectible must be recognized as an expense and not an
adjustment to revenue.
It is thus clear that the C15 600 owing by this customer must be written off as a bad or
doubtful debt expense, depending on the companys assessment of the probability of
recoverability. Either one of the following journals would then be appropriate:
Doubtful debt expense

Doubtful debts allowance (-ve asset)
Customer C has skipped the country and therefore the
recoverability is in question
Debit
15 600
Credit
15 600
OR
Bad debt expense
Debtors
Customer C has skipped the country and therefore the
recoverability is not expected: balance owing is written-off
Debit
15 600
Credit
15 600
Chapter 4: Page 40
ii
Chapter 5
Question
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
5.13
Key issues
Understanding provisional payments

Ledger accounts and disclosure of taxation expense and current tax asset/
liability
Calculation of provisional payments
Journal entries, ledger accounts and disclosure
Current normal tax: basic calculations and disclosure
Calculation of normal tax: (taxable profit includes a capital gain); disclosure
Calculation of normal tax: (taxable profit includes a temporary and permanent
differences); disclosure
VAT on companies
Disclosure of taxation on statement of comprehensive income, statement of
financial positions and notes
Statement of comprehensive income, statement of changes in owners equity and
notes to financial statements
Current normal tax: calculation and journals: involving accruals with opening &
closing balances
Current normal tax: calculation and journals: involving accruals with opening &
closing balances
Current normal tax calculations and journals
r'hantftr 5
41
Question 5.1
"The accountant says we underprovided for last years tax, yet we showed a current tax asset in
last year's statement of financial position.Ican't understand what he's talking about!"
Required:
Explain how the above situation could have arisen and how the under provision should be
accounted for.
Question 5.2
The following information relates to Misty Ridge Limited, which commenced business on
1 January 20X1. The financial year-end of the company is 31 December.
C
First year
30 June 20X1
3 1 December 20X 1
31 December 20X1
16 April 20X2
Provisional payment
Provisional payment
Provided for taxation
Amount of assessed normal tax on taxable
profit
Paid assessment
26 000
28 000
56 000
56 000
Provisional payment
Provisional payment
profit
Paid assessment
29 000
30 000
58 000
59 500
31000
31 500
65 000
64 800
18 May 20X4
Provisional payment
Provisional payment
profit
Paid assessment
Fourth year
30 June 20X4
3 1 December 20X4
31 December 20X4
Provisional payment
Provisional payment
33 000
34 000
67 400
16 May 20X2
Second year
30 June 20X2
31 December 20X2
31 December 20X2
19 May 20X3
19 June 20X3
Third year
30 June 20X3
31 December 20X3
31 December 20X3
18 April 20X4
All companies are required to make the provisional payments of tax during its financial year the first, half way through the financial year or earlier and the second on or before the last day
of the year
Required:
Chapter 5
42
a) Prepare the current tax liability/ asset and taxation expense ledger accounts for the four
years 20X1 to 20X4.
b) Show the relevant disclosure in the annua! financial statements of Misty Ridge Limited for
the four years ended 31 December 20X1 to 20X4 in respect of the above transactions.
Question 5.3
Part A
The accountant of Koogi Ltd. made the following estimates of the taxable profit for the year
ended 3 1 December 20X9:
On 30/6/20X9: estimated taxable profit for the year of C40 000

On 3 1/12/20X9: estimated taxable profit for the year of C50 000
On 30/4/20Y0: (when preparing the financial statements for the year ended 31/12/X9)
estimated taxable profit for the 20X9 year of C40 000
Tax on taxable profits is levied at 30%.
PartB
Assume the same information in part A above, with the exception that the estimated taxable
profit on 3 1/12/20X9 for the purpose of calculating provisional tax amounted to C30 000.
PartC
Assume the same information in part A above, with the exception that the estimated taxable
profit on 31/12/20X9 for the purpose of calculating provisional tax amounted to C15 000 and
the amount of assessed normal tax on taxable profit was CIO 000, (not C14 000 per e and f
of the required).
Assumption: Assume two provisional tax payments are required to be made as per the tax
laws during the year.
Required:
For each of Part A, B and C above, calculate:
a) The amount of the first provisional payment
b) The amount of the second provisional payment
c) The amount shown in the statement of comprehensive income as current tax for the year
ended 31/12/20X9
d) The balance on the current tax liability/ asset account shown in the statement of financial
position as at 31/12/20X9 assuming a zero opening balance at the beginning of the year.
e) Assuming that the amount of assessed normal tax on taxable profit was CI4 000,
calculate whether there is an under/over-provision of current tax in the following financial
year, in respect of 20X9. If so calculate the amount.
f) Assuming the same additional information given in (e) above (the amount of assessed
normal tax on taxable profit was C14 000 for 20X9) determine whether a refund is due by
the tax authorities or whether a payment with return is due to the tax authorities during the
following financial year in respect of 20X9. Calculate the amount.
Phanter 5
43
Question 5.4
Wak Limited is a company with a financial year ending on 28 February. The following
information relates to the financial years 20X6, 20X7 and 20X8:
Profit before tax

Tax expense
Tax payments made during the year
The amount of assessed normal tax on taxable profit for:
20X6 - Assessment received during 20X7 financial year
20X8 _ 20X7
C
C
16 700
15 200
5 845
5 320
5 950
5 000
20X6
C
12 000
4 200
4 000
4 600
4 825
6 000
Any amounts owing to or by the tax authorities (as a result of the tax authoritys amount
of assessed normal tax on taxable profit not equalling the accountants estimate) are settled
in the year the assessment is received.
There was no amount owing to the tax authority in respect of years prior to 20X6.
The tax on taxable profit remained 35% over the three years.
!
Required:
For each of the financial years in question, prepare journal entries to record the above
transactions, enter the journal entries in the relevant ledger accounts, and show how the above
information would be disclosed in the annual financial statements of Wak Limited.
Question 5.5
The following information has been provided in respect of Big Blue Ltd, a company that
began operations in 20X2:
The tax expense in the statement of comprehensive income for 20X3 is C83 650 (20X2:
C87 000).
The balance owing to the tax authority per the statement of financial position as at
31 December 20X2 was C5 000.
The amount of assessed normal tax on taxable profit for 20X2 finalized during 20X3,
stating that the tax for 20X2 (before taking into account any payments made during
20X2) was C85 900.
The total payments made to the tax authority in respect of normal income tax during
20X3 is C80 000 (including the provisional payments for 20X3 and any payment with
return/ refund in respect of 20X2).
Chapter 5
44
There was a capital profit of C13 000 (non-taxable), dividend income of C5 000 (nontaxable) and a fine of C500 (non-deductible for tax purposes) during 20X3.
Profit before tax in 20X3 is C300 000 (20X2: C290 000).
The rate of normal income tax is 30% on taxable profits. The tax rates have remained
unchanged since 20X2.
Required:
Prepare, in accordance with the International Financial Reporting Standards and to the extent
that information is available, the:
a) Taxation expense note for the year ended 31 December 20X3
b) Statement of financial position as at 3 1 December 20X3;
Accounting policy notes are not required.

Comparative figures are required
Question 5.6
The profit before tax of Zac Ltd for the year ended 31 December 20X2 of C500 000 includes
the following items:
Profit of C100 000 on sale of a building. The original cost was C300 000 and its carrying
amount and tax base were both C280 000 on the date of the sale. Assume that the Sale
Proceeds for tax purposes shall be taken up to the maximum of the cost of building.
Dividend income of CIO 000 is taxable at 10%.
Donations of C50 000 (not deductible).
Traffic fines of C30 000 (not deductible).
The applicable tax rate was 30% on taxable profits. Assume that no dividends were declared
during the year and that there were no temporary differences during the year.
Required:
a) Calculate the taxable profit and current tax,
b) Show how this will be disclosed in the statement of comprehensive income and taxation
note for the year ended 31 December 20X2 in accordance with International Financial
Question 5.7
Wac Ltd has profit before tax of C250 000 for the year ended 31 December 20X1. When
calculating this figure, the following information was correctly accounted for:
Unearned sales income of C24 000 received in advance in respect of 20X2 (taxable in the
year).
current
45
Interest income of C7 000 is receivable (taxable in the current year)
Telephone payment of C5 000 is due for 20X1 but has not yet been paid (deductible for
tax purposes in the current year)
The rent for the first month in 20X2 of CIO 000 has already been paid (deductible for tax
purposes in the current year).
Dividend income of CI2 000 was earned during 20X1 taxable at 10%
A donation of C8 000 was paid during 20X1 (not deductible for tax purposes)
Depreciation
C25 000.
of C40 000 was expensed during the year. The tax
depreciation is of

The applicable tax rate is 30% on taxable profits. There are no other permanent or temporary
differences other than those apparent from the above information.
Required:
a) Calculate the current tax and show the related journal entries.
b) Show the disclosure of taxation in the statement of comprehensive income and taxation
expense note for the year ended 31 December 20X1 in accordance with International
Ignore deferred taxation.
Question 5.8
BG Ltd, registered as a vendor for VAT purposes, has the following transactions for the
month of March 20X9:
Bought inventories with a marked price of C200 000 from a non-VAT vendor.
Bought inventories from a VAT vendor. The invoice totalled C33 000.
Sold inventories to Mr. A (a non-VAT vendor) with an invoice value of C800 (includes
VAT).
Sold inventories to Mr. B (a VAT vendor) with an invoice value of C12 000 (includes
VAT).
Paid electricity and water: C420 (includes VAT).
Paid telephone of C190 (includes VAT).
Paid salaries of C20 000 in cash. Employees tax owing to the tax authority as a result
came to C8 000. VAT is not ievied on salaries.
Chanter5
Paid Cl 1 000 employees tax during the month and there was
beginning of the month of C6 000.
The balance on the VAT account at the beginning of the month was C2 000 (debit).
A VAT refund of C5 000 was received during the month of March 20X9.
* Dividend
balance owing at the
income of C12 000 was earned during the month. VAT is not levied on
dividends.
Dividends of C18 000 were declared during the month. VAT is not levied on dividends.
Rate of VAT is 14%.

Required:
a) Journalise the above transactions.
b) Show how the above would be disclosed in the financial statements of BG Ltd for the
month of March 20X9.
Question 5.9
The following balances were extracted from the books of Peach Limited at 31 May 20X6:
C
115 000 (Cr)
15 000 (Dr)
Profit before tax
Dividends paid - 30 November 20X5

Provisional tax payments
43 000 (Dr)
Additional information
Included in the profit before tax are dividends received of C8 000, other expenses of
C40 000 and interest paid of C2 000.
The company declared a final dividend of CIO 000 on 31 May 20X6.
Taxation for the year has not yet been calculated. Assume all revenue included in profit
for the year to be taxable and all expenses to be deductible. The normal tax rate is 35%
on taxable profits and the tax rate on dividend income is 10%
As the assessed amount of normal tax on taxable profit was received in May of the
current year from the tax authority in respect of the 20X5 tax year which showed that
there had been an under provision of Cl 500 in that year.
Required:
a) Prepare the statement of comprehensive income of Peach Limited for the year ended
31 May 20X6 (starting with the gross profit).
f'tMmtoir
47
b) Prepare the statement of financial position of Peach Limited at 31 May 20X6.

c) Prepare the taxation note for the financial statements of Peach Limited.
Question 5.10
The financial director of Caribbean Limited is in the process of finalizing the financial
statements for the year ended 28 February 20X7. The trial balance at that date is as follows:
CARIBBEAN LIMITED
Debit
Share premium
Distributable reserves
Borrowings
Accounts payable
Accrued expenses
Accounts receivable
Accrued income
Inventory
Tax Refundable
Cash at bank
Credit
3 000 000
1500 000
1 424 200
2 000 000
400 000
20 000
4 200 000
1 100000
15 000
1 800 000
200 000
2 059 200
12 000 000
Revenue
Cost of sales
Net operating expenses
Interest on borrowings
Share issue expenses
7 100 000
3 480 000
240 000
150 000
344
20
200
4
20 344 200
The authorized share capital comprises 10 000 000 ordinary shares of 0.50c each.
During
the year, 1 000 000 shares were issued at a price of C2.00. The issue of the shares has
been correctly recorded in the accounting records. Share issue expenses of C150 000
were paid. The financial director wishes to account for these expenses with the minimum
impact on distributable reserves.
The borrowings relate to a loan taken out by Caribbean Limited on 1 July 20X4 for a
three year period. The company does not have the right to defer settlement of the loan.
The balance on the property, plant and equipment comprises land with a carrying amount
of C3 150 000 and plant and equipment with a carrying amount of R1 050 000. Property
is measured at revalued amount and plant and equipment is measured at cost.
At year end, the directors engaged the services of an independent valuer who has valued
the property at C3 950 000. There is no intention to sell the land. The managing director,
who is not an accountant but has been perusing the IASB website, has queried whether the
revaluation surplus should be recognized as income based on the following paragraph in
IAS 1: An entity shall recognize all items of income and expense in a period in profit or
loss unless an IFRS requires or permits otherwise. (IAS 1, para 88).
Chapter 5
48
During the year, an item of plant and equipment was sold for C330 000. This item of
plant had cost C300 000 and to date of sale accumulated depreciation and tax allowances
amounted to 120 000. The sale of the plant has been correctly recorded in the accounting
records and has been netted off against the operating expenses.
The inventory has a net realizable value of Cl 720 000 and the accounts receivable are
expected to realize C980 000.
Included in the operating expenses are depreciation of property, plant and equipment
amounting to C210 000, salaries of Cl 800 000, advertising of C35 000, repairs to
equipment of C28 000 and auditors remuneration of Cl 10 000.
Dividends of five cents per share were declared on 25 March 20X7. The financial
statements were authorized for issue on 30 March 20X7.
The financial director wishes to present the statement of comprehensive income and the
statement of financial position in accordance with the requirements of IAS I.
The current normal income tax rate is 29%.
Required:
a) Prepare the statement of comprehensive income of Caribbean Limited for the year ended
28 February 20X7, in accordance with International Financial Reporting Standards

b) Prepare the statement of changes in equity of Caribbean Limited for the year ended

c) Prepare the current liabilities section of the statement of financial position of Caribbean
Limited at 28 February 20X7, in accordance with International Financial Reporting

Standards
d) Prepare the following notes to the financial statements in accordance with International
Financial Reporting Standards
Statement of compliance and accounting policy for basis of preparation

Share capital, profit before tax, taxation expense and dividends
Ignore deferred tea
Question 5.11
Gripping Limited has provided you with the following extracts of its draft financials for the
year ended 31 December 20X3:
Profit before tax

Included in the profit before tax is:
- donations to various charities
profit on sale of vehicle
depreciation on machine (purchased in yr 2)
(Tax depreciation: 25 000 in year 2 and 25 000 in year 3)
profit on sale of this machine (cost 70k, sales proceeds 80K)
Chanter 5
20X1
C
300 000
20X2
20X3
400 000
450 000
40000
50000
0
0
0
0
15 000
iSOOO
40 000
49
Income received in advance (closing balance)

Expenses prepaid (closing balance)
20 000
30 000
10 000
40 000
40000
20000
The following tax related information has been provided to you:
Capital gain on sale of vehicle/ machine

Provisional tax payments
Tax payment with return for previous year (assume payments
made in full)
Tax for year 1 (per assessment received during year 2)
Tax for year 2 (per assessment received during year 3)
20X1
C
15 000
60 000
20X2
n/a
20X3
?
100 000
n/a
70 000
94 000
114 500
There were no other assets or liabilities other than those mentioned above.
There were no other permanent or temporary differences other than those mentioned
above.
20X1 is the first year of operations.
Required:
Provide all journal entries relating to the current normal for each of the years ended 31
December 20X1, 20X2 and 20X3. Ignore deferred tax.
Question 5.12
Alaska Limited correctly calculated profit before tax of C885 000 after taking into account
the following:
Depreciation on office equipment of Cl 10 000 in 20X8. The local tax authority allowed
the deduction of C80 000 capital allowances on this equipment in 20X8.
Rental income received in advance (taxable when received):

3 1 December 20X7: C6 500
31 December 20X8: C7 500
Insurance expense prepaid:

31 December 20X7: C3 000
3 1 December 20X8: C6 000
A provision
for leave pay of C50 000 was raised on 31 December 20X8. The tax
authority only allows this to be deducted when paid.
A profit was made on sale of machinery' of Cl50 000. The machine was acquired on
1 January 20X6 at a cost of C600 000 and sold on 31 December 20X8. Depreciation is
calculated at 25% p.a. straight line to a nil residual value. Capital allowances of 20% p.a.
straight line are granted.
A VAT penalty of C6 000 was paid for late payment of VAT.
Chapter 5
50
.*

r
Total tax depreciation for the year of assessment is C170 000.
The 20X5 tax assessment arrived in June 20X6 and reflected current normal tax of
C234 000.
The first provisional tax payment was made on 31 December 20X5 on an estimated
taxable income of C600 000.
The second provisional tax payment was made on 30 June 20X6 on an estimated taxable
income of C405 000.
The Cl 1 350 owing at the beginning of the year was paid on 1 September 20X5.
The corporate normal tax rate is 30%.
There are no other permanent or temporary differences other than those evident from the
information above.
Required:
a) Calculate the current normal tax for the year ended 30 June 20X6.
c) Prepare all the journals relating to current tax for the year ended 30 June 20X6.
Chapter 5
52
i
*
A non-deductible traffic fine of Cl 000.
Dividends received of C60 000.
The tax assessment for 20X7 arrived in 20X8 and indicated taxable profits of C700 000.
Current normal tax of C230 000 was recorded in 20X7.
The corporate normal tax rate is 30% for both 20X7 and 20X8.
Dividends are exempt from tax.
The balance owing to the tax authorities at 31 December 20X7 was C8 000.
Payments of C200 000 have been made to the tax authorities during 20X8.
Required:
a) Calculate the current normal tax for the year ended 31 December 20X8.
b) Prepare the journal entries relating to current tax, the accruals and the provision.
Question 5.13
DCI Limited has correctly calculated profit before tax of C535 000. An extract from the
statement of comprehensive income for the year ended 30 June 20X6 is as follows:
20X6
C
30 000
50000
190 000
30 000
20 000
?
Donation (non-deductible: for tax purpose)

Donation (deductible: for tax purpose)
Depreciation on plant and machinery
Profit on sale of plant
Impairment of machinery
Profit on sale of machine
An extract from the statement of financial position for the year ended 30 June 20X6 is as
follows:
20X6
Accrued expenses
Expense prepaid
Current tax payable
4 000
17 000
5 500
?
20X5
C
11000
18 000
8 900
11 350
The profit on sale relates to plant that was sold for C230 000 and had originally cost of
C800 000. Total capital allowances claimed to date on the plant are C400 000 (up to and
including the 20X6 financial period).
An item of machinery (not the item impaired above) was sold during the year. The
depreciation on this machine is included in the Cl90 000 depreciation mentioned above.
Accounting profit realised was C120 000. Its cost was C100 000, carrying amount of
C80 000 and a tax base of C90 000 on the date of sate.
51
[Part j
Chapter 6
Question
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10
6.11
6.12
6.13
6.14
6.15
6.16
6.17
6.18
6.19
6.20
Key issues
Basic calculation of current tax and deferred tax, journal entries, ledger
accounts, disclosure
Basic calculation of current tax and deferred tax, journal entries, disclosure
Basic calculation of current tax, deferred tax, disclosure with ledger accounts
Relating tax and deferred tax to the accounting framework
Calculations, journal entries, ledger accounts, disclosure and discussion
requiring an understanding of temporary differences arising from capital
allowances and year-end accruals
Calculation of deferred tax and current tax, journal entries, statement of
financial position note disclosure
Calculation of current tax, deferred tax, journal entries:
Part A: no rate change
Part B: with rate changes
Statement of comprehensive income, statement of financial position and note
disclosure:
Part A: no rate change
Part B: with rate changes
Temporary differences relating to capital allowances
Part A: basic calculations and journals with no sale of asset
Part B: calculations, journals and disclosure with sale of asset at below cost
Disclosure of tax expense note and including overprovision
Deferred tax calculation and journal entries for depreciable asset, income
received in advance and expenses prepaid
Calculation of normal income tax (current and deferred), and policies
incorporating statement of cash flows
Journal entries and disclosure: relating to current tax, deferred tax and
overprovision
Journal entries, statement of comprehensive income and tax expense note
(depreciable asset and year-end accruals)
Deferred tax loss recognised
Deferred tax loss un-provided
Deferred tax loss
Calculation of current and deferred tax
Deferred tax involving accruals with opening & closing balances
Deferred tax involving accruals with opening & closing balances
Chanter 6
53
Question 6.1
The profit before tax of Look Limited for the year ended 28 February 20X1 is C100 000.
Included in this amount are the following:
Capital profits (not taxable)

Donations (not deductible)
50000
30 000
Expenses prepaid of C40 000 were correctly accounted for. These expenses are allowed as a
deduction for tax purposes in 20X1. There were no other temporary or permanent differences
other than those evident from the information given.
There is no other information/ transaction that affects the current tax payable/ receivable
account. There are no components of other comprehensive income.
The normal tax rate is 30%.
Required:
a) Calculate the current tax and deferred taxation for 20X1.
b) Show the ledger accounts for current and deferred tax for the 20X1 year.
c) Prepare the tax expense note.
d) Show the journal entries relating to tax in the 20X1 year.

e) Prepare extracts from the statement of comprehensive income for the year ended
28 February 20X1.
Comparatives and notes are not required.
f)
Prepare extracts from the statement of financial position as at 28 February 20X 1.

Comparatives and notes are not required.
Question 6.2
At 30 June 20X6 the statement of financial position of Eye Limited included a deferred tax
liability amounting to Cl1 152. The deferred tax relates to the only item of equipment owned
by the company.
The following particulars are supplied:

For the year ended 30
June _
20X7
20X8
282 000
252000
50000
40000
48 000
48 000
Profit before tax

Tax depreciation
Accounting depreciation
Chapter 6
54
Gripping IFRS ; Graded Questions
The tax base of the equipment at 30 June 20X6 was C356 120.
The current normal tax for the year ended 30 June 20X7 is paid in July 20X8. No other tax
payments were made.
Assume a constant tax rate of 40%.
Required:
a) Show the journals relating to tax and depreciation for the years ended 30 June 20X7 and
30 June 20X8.
b) Prepare extracts from the statement of financial position of Eye Limited at 30 June 20X8 and
statement of comprehensive income and notes to the financial statements for the years ended
on that date in accordance with the requirements of International Financial Reporting
Standards.
Question 6.3
Phobie Limited, with no expenses and no income other than rent income, received the
following cash over two years:
Received in 20X1: rent income of CIO 000 in respect of 20X2
Received in 20X2: rent income of Cl10 000 in respect of 20X2
The normal tax rate has remained constant at 30% over both years. Rent is taxed on receipt
basis.
Required:
a) Calculate profit before tax, as it would appear in the statement of comprehensive income.
b) Calculate the taxable profit and current taxation for both 20X1 and 20X2.
c) Calculate the effective rate of tax over both years (separately and in total) assuming that
only current tax is recognised (no deferred tax is recognised).
d) Show the ledger accounts for 20X1 and 20X2, taking deferred tax into account.
e) Show how this will be disclosed in the tax expense note.
f) Show the journal entries relating to tax and year end accruals for 20X1 and 20X2.
Question 6.4
Walnut Limited has a new and inexperienced financial accountant who insists that an estimate
of current normal corporate tax should not be processed in its financial statements for the year
ended 3 1 December 20X3. His reasoning is that the official 20X3 tax assessment has not yet
arrived and he believes that it is only once this official assessment has been received that the
amount will be known and a liability can be recognised.
He is also of the opinion that the deferred tax liability of C50 000 shown in the statement of
financial position as at 31 December 20X2 should be reversed since this does not meet the
definition of a liability.
Neither current tax nor deferred tax has been processed in Walnut Limiteds current 20X3
financial statements. The auditors are therefore requesting that Walnut Limited include the
following in the 20X3 financial statements:
Current normal tax of C80 000 in respect of 20X3;
An under-provision of current normal tax relating to 20X2 of C7 000; and
A deferred normal tax liability of C60 000.
Required:
a) Explain by way of a discussion of the relevant definitions and recognition criteria whether
or not the current normal tax liability and related tax expense of C80 000 should be
raised.
You are not required to discuss either the under-provision

C7 000 or the deferred tax liability ofC60 000.
of prior year current tax of
b) Provide all relevant tax-related journal entries that you believe should be processed by
Walnut Limited in order to finalise its financial statements for the year ended
31 December 20X3.
Closing transfer entries are not required.
Question 6.5
The following deferred tax working papers of Blue Cheese Limited have been partially
prepared at 28 February 20X2.
Carrying
Tax
base
amount
Property, plant &

equipment:
Balance - 28/02/20X1
145 000
Balance -28/02/20X2
120 000
Rent received in advance:

Balance -28/02/20X1
(2000)
(5 000)
Interest income receivable:

Balance -28/02/20X2
20 000
115 000
Temporary
difference
Deferred
tax
Property,
plant and
Deferred tax summary

equipment
0
Rent
received in
advance
?
Income
receivable
?
Total
?
?
There were no purchases or sales of property, plant and equipment during the year ended
28 February 20X2. The company tax consultant has confirmed the income tax treatment of
the above items for the year ended 28 February 20X2 as follows:
Income tax treatment
Taxable in the year of receipt
Taxable in year interest is earned
C30 000
Statement of financial position item

Rent received in advance
Interest income receivable
Tax depreciation
The profit before tax is C100 000 and there are no permanent or temporary differences other
than those that may be evident from the information provided.
The current tax payable: normal tax account had a credit balance of CIO 000 on
1 March 20X1. No payments were made to the tax authority during the year ended
28 February 20X2.
Required:
a)
Complete the deferred tax working paper.
b)
Calculate current normal tax.
c)
Show the related ledger accounts.
d) Disclose all information possible in the statement of financial position of Blue Cheese
Limited.
Notes are not required.
in the financial statements of Blue Cheese Limited as at
e)
Show the deferred

28 February 20X2.
f)
For each statement of financial position item on the deferred tax working paper, explain
the conceptual meaning of the carrying amount and tax base, and thereby justify the
resulting temporary difference and deferred tax. In preparing your answer, bear in mind
the following quotation:
tax note
The objective of this IFRS is to prescribe the accounting treatment for income taxes.
The principal issue in accounting for income taxes is how to account for the current and
future tax consequences of the future recovery (settlement) of the carrying amount of
assets (liabilities) that are recognised in an entitys statement of financial position
(IAS 12, Income taxes, Objective)
if*!*
57
Question 6.6
Fish Ltd is a company operating in the food industry. The following information has been
presented to you:
FISH LIMITED
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X3
_

Expenses prepaid (this is allowed as a deduction for tax purposes in
20X3)
Income received in advance (taxable in the year of receipt)
20X3
C
?
10 000
355 000
0
28 000
15 000
20X2
The tax base of the property, plant and equipment balance at 31 December 20X2 was
C290 000.
During 20X3 depreciation was C35 000 and tax depreciation allowed was C25 000.
There was no other movement of property, plant and equipment during 20X3.
Profit before tax is C300 000.
Dividend income of C5 000 was earned during 20X3. Dividend income is taxable at 10%
There are no other temporary or permanent differences other than those evident from the
information provided.
The normal income tax rate is 30%.
Required:
a) Calculate the deferred normal income tax balance at 31 December 20X2 and
31 December 20X3.
b) Calculate the current normal income tax for the year ended 3 1 December 20X3.
c) Journalise the current and deferred normal income tax adjustments for the year ended
31 December 20X3.
d) Disclose the deferred tax note to the statement of financial position as at
3 1 December 20X3 in accordance with International Financial Reporting Standards.
Question 6.7
The information given below is in respect of Factory Limited, a manufacturing company:
* Factory Limited owned
two manufacturing plants: one had been purchased on

1 January 20X1 for C200 000 and the company then built a second plant at a cost of
C500 000. The first plant was put into operation on 1 January 20X1 (the same day of
Chapter 6
58
1
ft
acquisition), whereas the second plant was completed on 30 June 20X1 but only became
available for use on 1 January 20X2, on which date it was brought into production.
Depreciation is provided at 20% per annum on the straight-line basis to nil residual
values. The tax authorities allow tax depreciation on the full cost of plant over four years,
apportioned from the date on which it was brought into use.
The company earned profits before taxation and before depreciation of C200 000 in all
three years.
The opening balance on the deferred tax account in the statement of financial position
was zero on 1/1/20X1.
There are no other temporary or permanent differences other than those that may be
evident from the information provided.
Part A:
Assuming that the normal tax rate remained at 35% for all years affected:
Required:
a) Calculate the current normal taxation for the years ending 31 December 20X1 to 20X3.
b) Calculate the deferred normal tax charge using the income statement approach for the
years ending 31 December 20X1, 20X2 and 20X3.
c) Journalise the entries for current tax and deferred tax for each of the years ended
31 December 20X1, 20X2 and 20X3.
d) Prove the balance on the deferred tax asset / liability account using the balance sheet
approach (comparing the carrying amounts and tax base of the machines).
Part B:
Assuming that the normal tax rate is 35% in 20X3 but 45% in 20X2 and 40% in 20X1:
Required:
a) Calculate the current normal taxation for the years ending 31 December 20X1 to 20X3.
b) Calculate the deferred normal tax charge using the income statement approach for the
years ending 31 December 20X1, 20X2 and 20X3.
c) Journalise the entries for current tax and deferred tax for each of the years ended
31 December 20X1, 20X2 and 20X3.
d) Prove the balance on the deferred tax asset / liability account using the balance sheet
approach (comparing the carrying amounts and tax base of the machines).
59
Question 6.8
The draft statement of comprehensive income of Hobbit Ltd for the year ended
31 December 20X1 is shown below:
HOBBIT LIMITED
C
1 000 000
(400 000)
600 000
300 000
Revenue
Cost of sales
Gross profit
Other income
Other expenses
(403 000)
497 000
497 000
The following end of year adjustments need to be accounted for:
Rent received in advance of C5 000 is included in other income (taxable in 20X1).
Rates prepaid of C6 000 in respect of 20X2 are included in other expenses (deductible
for tax purposes in 20X1).
Advertising costs payable at year-end total CIO 000 (deductible for tax purposes in
20X1).
Interest income of C20 000 is receivable at year-end (taxable in 20X1).
Other relevant information:
Dividend income of C30 000 is included in other income (exempt from tax).
Fines of C9 000 are included in other expenses (not deductible for tax purposes).
Dividends of C80 000 have been declared on 30 December 20X1.
The deferred tax account at 31 December 20X0 had a credit balance of Cl2 000 which
related purely to taxable temporary differences arising from capital allowances on plant.
The tax base of the plant at 31 December 20X0 was Cl15 000. At 31 December 20X1 the
carrying amount of the plant amounted to C120 000 and the tax base amounted to
C85 000. No plant was sold or purchased during the year.
Part A
Assume that the statutory normal tax rate has remained unchanged for many years at 30%.
Required:
a) Prepare an extract from the statement of comprehensive income of Hobbit Limited for the
year ended 31 December 20X1, starting with profit before tax.
Chanter 6
6.0
i
-
b) Show how deferred tax will be disclosed on the statement of financial position of Hobbit
Limited at 31 December 20X1.

c) Prepare the notes to the financial statements relating to taxation and deferred tax at
31 December 20X1.
Comparatives for the tax expense note are not required.

Part B
Assume that the statutory normal tax rate was 40% up to 31 December 20X0 and that the rate
changed to 30% during the year ended 31 December 20X1.
Required:
a) Prepare an extract from the statement of comprehensive income of Hobbit Limited for the
year ended 31 December 20X1, starting with profit before tax.

b) Indicate how deferred tax will be disclosed on the statement of financial position of
Hobbit Limited at 31 December 20X1.
c) Prepare the notes to the financial statements relating to taxation and deferred tax at
31 December 20X1.
Comparatives for the tax expense note are not required.
Question 6.9
Make Limited bought a manufacturing plant on 1 January 20X2 and put it into production
immediately.
The plant cost C500 000 and had a useful life of five years.
Make Limited depreciates plant over 5 years (straight-line to nil residual value).
The tax authorities allows tax depreciation on the following basis:
50% of the cost in the first year

30% of the cost in the second year
20% of the cost in the third year
The profit before taxation in 20X5 was C150 000 (20X4: C120 000).
The tax rate remained constant at 40% from 20X2 to 20X5.
The companys financial year ends on 31 December.

There are no other temporary or permanent differences other than those evident from the
information given.
Plant is the only item of property, plant and equipment.
Chapter 6
61
dripping IFRS : Graded Questions
Part A
Required:
a) Calculate deferred tax using the balance sheet approach for 20X2 to 20X6.
b) Calculate the taxable profit and current tax expense for 20X4 and 20X5.
c) Journalise the deferred tax adjustments for each of the years 20X2 to 20X6 and journalise
the current tax for 20X4 and 20X5.
}
Part B
Use the same information but that the plant was sold for C100 000 on 3 1 December 20X5:
Required:
a) Calculate deferred tax using the balance sheet approach for 20X2 to 20X5.
b) Calculate the taxable profit and current tax expense for 20X4 and 20X5.
c) Journalise the deferred tax adjustments for each of the years 20X2 to 20X5 and the
current tax
for 20X4 and 20X5.
d) Disclose the relevant information, with comparatives, in the financial statements of
Make Limited for the year ended 3 1 December 20X5 in accordance with International
Question 6.10
The following information relates to Root Limited for its financial year ended
31 December 20X6:
Profit before tax for the year ended 31 December 20X6 has been correctly calculated at
C344 000.
Included in the profit before tax for the year ended 3 1 December 20X6 are the following
items, amongst others:
C
200000
100 000
Dividend income- taxable at 10%

Profit on sale of vehicle
Depreciation
(150 000)
The following balances have been extracted from the trial balance at 31 December 20X6:
Income received in advance: 31 December 20X6 (31 December 20X5:

10000)
Expenses prepaid: 31 December 20X6 (31 December 20X5: 15 000)
Chapter 6
C
130 000
7 000
62
The tax authorities:
granted tax depreciation of C270 000 as a deduction in 20X6;

tax income received in advance in the year of receipt; and
allow the expenses prepaid as a deduction for tax purposes in the year in which they
are paid.
A vehicle was sold during 20X6. On the date of sale, its carrying amount was C700 000,
and its tax base was C650 000. Its original cost was C750 000.
* The tax assessment for the 20X5 tax year was received in August 20X6 and showed an
assessed tax on taxable profit amounting to C 48 000. The total tax expense as reported
on the 20X5 statement of comprehensive income amounted to C98 000, comprising
current normal tax of C52 000, deferred normal tax of C46 000. No journal entries have
yet been processed to take into account any adjustments that may be necessary.
The deferred tax balance at the beginning of the year is C16 500 (credit) whereas the
deferred tax balance at the end of the year is C900 (debit).
Dividends of C220 000 were declared in 20X6.
There are no permanent or temporary differences other than those presented in the above
information. All amounts are considered material.
Required:
a) Show how the tax expense note is disclosed in the annual financial statements of Root
Limited for the year ended 3 1 December 20X6 in accordance with International Financial
b) Prepare an extract from the statement of comprehensive income of Root Limited for the
year ended 31 December 20X6 beginning with the line item profit before tax.
Chanter ft
(A
Question 6.11
Tree Limited is preparing its annual financial statements for the year ended
31 December 20X6. The following information is relevant:
TREE LIMITED
EXTRACT OF TRIAL BALANCE AT 31 DECEMBER
20X6
20X5
Dr/ (Cr)
Dr/ (Cr)
(123 000)
(0)
0
5 000
150 000 1 000 000
(6 000)
?
(16 500)
?

Expenses prepaid
Current tax payable: normal tax
Deferred tax: normal income tax
Income received in advance is taxed in the year of receipt whereas expenses prepaid are
deducted for tax purposes in the year of the payment.
The tax base of property, plant and equipment at 31 December 20X6 was C30 000.
During 20X6, the assessment showed that the current normal tax in 20X5 was
overprovided by C4 000.
The current normal tax was calculated at C57 600 for the 20X6 tax year.
Provisional normal tax payments made during 20X6 amounted to C30 000.
There are no other temporary differences other than those evident from the information
provided above.
The normal tax rate is 30% (unchanged for many years).
Required:
a) Process all journal entries affecting the tax expense account for the year ended
31 December 20X6.
b) Prepare, in accordance with International Financial Reporting Standards, the following
extracts from the annual financial statements of Tree Limited:
the statement of financial position at 31 December 20X6

the deferred tax note at 31 December 20X6
Comparatives are required
Question 6.12
Bean Limited is a company that assembles, distributes and rents cappuccino and espresso
machines for the coffee shop, society and the home market. It began operations on 1 July
20X4 and uses one major item of equipment to assemble its products.
Chapter 6
64
1m
m.
The company purchased the assembly equipment on 1 July 20X4 at a cost of C900 000.
The equipment is depreciated on the straight line basis over its estimated useful life of ten
years, with no residual value. The tax authority grants an allowance of 20% per annum,
not apportioned for time.
The financial accountant has prepared the following schedule relating to deferred taxation
at 30 June 20X6, before the impairment of the asset:
Accounts
Equipment
01/07/X4 Cost
30/06/X5 Depreciation /
tax allowance
30/06/X6 Depreciation /
tax allowance
Preliminary
balance
Tax Base
Timing
Difference
Deferred
Tax
(X29%)
900 000
900 000
(90 000)
(180 000)
810 000
720 000
(180 000)
90 000
26 100
(90 000)
720 000
540 000
180 000
52 200
At 30 June 20X6, there are indications that the equipment is impaired. An impairment
test is performed and the recoverable amount is estimated at C600 000. The remaining
useful life is estimated to be five years with no residual value. The impairment is
recorded correctly in the accounting records.
The equipment was sold on 30 October 20X6 for an amount of C500 000.
The directors decided to rent equipment rather than buying new equipment. The rent is
payable six monthly in advance and an amount of C270 000 was paid on
1 November 20X6 and on 1 May 20X7. Expenses paid in advance are deductible for tax
purposes when paid.
Bean Limited receives rental income in advance in relation to coffee machines that it rents
to coffee shops. Rental income received in advance at 30 June 20X7 amounts to C20 000.
There was no rental income received in advance at 30 June 20X6. Income received in
advance is taxed when received.
The financial accountant has prepared the following schedule relating to current taxation:
Amount provided for current normal tax

1st and 2nd provisional payments
Balance on current tax payable account
profit
Year end
30/06/X7
?
146 000
?
Not yet
Year end
30/06/X6
?
142 000
?
162 100
Year end
30/06/X5
135 100
130 000
5 100
132 200
received
The company paid the balance owing on assessment in December 20X5 (for the year
ended June 20X5) and in December 20X6 (for the year ended June 20X6).
Chanter 6
65
The profit before taxation of the company has been correctly calculated at C520 000 for
the year ended 30 June 20X6 and at C700 000 for the year ended 30 June 20X7. All
accounting entries relating to the equipment, the rent paid and the rent received have been
correctly included in the calculation. The profit before tax for both years also includes
dividend income of C40 000 for 20X6 and C30 000 for 20X7. No dividends were paid
during either year.
The financial accountant has extracted the following balances relating to the trading
activities:
Sales
Accounts receivable
Bad debts expense
Inventory
Accounts payable
Year end 30/06/X7

Credit
Debit
3 500 000
196 000
14 000
240 000
174 000
Year end 30/06/X6

Debit
Credit
2 600 000
184 000
9 000
115 000
102 000
The normal company tax rate for all years is 29%.
Required:
a) Show how deferred tax would be reported on the statement of financial position of Bean
I
*
Limited at 30 June 20X7.

Comparative figures are required.
b) Show how current tax would be reported on the statement of financial position of Bean
Limited at 30 June 20X7.

c) Prepare the accounting policies note (incorporating policies for basis of preparation,
deferred tax and equipment) and the taxation note of Bean Limited for the year ended
30 June 20X7.

d) Prepare the operating activities section of the statement of cash flows of Bean Limited for
the year ended 30 June 20X7.
Comparative figures are not required
Chapter 6
66
1-
Question 6.13
Universal Fitness is a company that operates a chain of gyms in Gauteng. The trial balance of
Universal Fitness at 3 1 December 20X7 is as follows:
UNIVERSAL FITNESS
TRIAL BALANCE AT 31 DECEMBER
20X7
Debit
Retained earnings
Long-term loan
Deferred tax (31/12/X6)
Accounts payable
Unearned income
Profit before dividend income and interest
Dividends received
Land at cost
Administration buildings (at carrying amount)
Equipment (at carrying amount)

Accounts receivable
Prepaid expenses
Current tax asset/ liability
Interest expense
Dividends
2470 000
1 600 000
630 000
380 000
25 000
102 000
75 000
30 000
5 312 000
Credit
200 000
1 770 725
500 000
66 525
286 000
63 750
2 410 000
15 000
5 312 000

i. Profit before dividend income and interest has been correctly calculated and includes the
depreciation on both the administration building and the equipment as well as a donation
to Save the Penguin Fund of C20 000. The Save the Penguin Fund is not a recognised
charity in terms of the Income Tax Ordinance.
2. Assume that the tax authority does not grant any tax allowance on the administration
buildings. The depreciation for the year ended 3 1 December 20X7 amounts to C120 000.
3. The tax base of the equipment at 31 December 20X7 is C364 000. For the year ending
31 December 20X7, depreciation on equipment amounts to C170 000 and the tax
allowance amounts to Cl88 000.
4. The unearned income is taxed in the year of receipt and the prepaid expenses are
deductible in the year of payment.
5. The deferred tax balance at 3 1 December 20X6 comprises a taxable temporary difference
on the equipment of C248 000 and a deductible temporary difference on the unearned
income of C26 250.
6. The tax assessment for the 20X6 year was received during 20X7 and showed that the
amount of the assessed tax on taxable profit was C5 000 less than the amount provided
for current normal tax in the previous year.
7. Other than mentioned above, all income is taxable and all expenses are deductible.
8. The normal tax rate is 30%.
C.banter 6
67
Required:
a) Prepare the journal entries to be processed at the end of the year to account for the current
tax, deferred tax and overprovision.
b) Prepare all the notes relating to tax expense and deferred tax in accordance with

Accounting policies are not required
Question 6.14
Rainy Limited is a company involved in the manufacture of Wellington boots. Its financial
year ends on 3 1 December.
The following balances (not yet recognized in statement of comprehensive income) have
been extracted from its trial balance at 31 December 20X6:
Rent income received in advance: 31 December 20X5
Expenses prepaid: 3 1 December 20X5
10 000
15 000
The following has been recognised in statement of comprehensive income:
Rent income received in advance at 31 December 20X6 totalled C8 000. Income

received in advance is taxed in the year of receipt.
Expenses
prepaid at 31 December 20X6 totalled C7 000. Expenses prepaid are

deductible for tax purposes in the year in which they are paid.
Other than the processing of provisional payments made during 20X6 (which totalled
Cl80 000), no other journal entries have yet been processed regarding tax expense.
Tax depreciation of C270 000 was granted as a deduction in 20X6 by the tax authorities.
The tax assessment for the tax year 20X5 was received in August 20X6. It reflected an
amount of C48 000 for the assessed normal tax on taxable profit for 20X5. The total tax
expense in the statement of comprehensive income in 20X5 was disclosed as C98 000,
being made up of current normal tax of C52 000, deferred normal tax of C46 000. No
journal entries have yet been processed to take into account any adjustments that may be
necessary.
A vehicle with a carrying amount of C700 000 (and tax base of C650 000) was sold
during 20X6. Its original cost was C750 000.
Chapter 6
68
II*
The draft results of operations for the year ended 31 December 20X6 is shown below.
RAINY LIMITED
Sales
Rent income
Dividend income
Profit on sale of vehicle
Cost of sales
Depreciation (all depreciation relates to sales representative vehicles)
Interest expense
Other expenses
Dividends declared (30 June 20X6)
Amount to be carried forward to Retained Earnings
Retained earnings: 31 December 20X6
20X6
C
800 000
50 000
200 000
100000
(300 000)
(150 000)
(120 000)
(80 000)
(220 000)
280 000
60 000
340 000
Other expenses are allocated to the entity's core functions as follows:

Distribution: 30%
Administration: 20%
Other: 50%
All amounts are considered material.
The deferred tax balance at the beginning of the year is C42 000 (debit) whereas the
deferred tax balance at the end of the year is C22 800 (debit).
The normal tax rate is 30% and dividend income is exempt from tax.
Required:
a) Process all journal entries required to finalise the financial statements for the year ended
31 December 20X6.
Closing journal entries are not required.
b) Prepare the statement of comprehensive income, using the function method (disclosing
the analysis of costs by function on the face of the statement of comprehensive income)
c) Prepare the tax expense note to be included in the annual financial statements of Rainy
Limited for the year ended 31 December 20X6 in accordance with International Financial
69
Question 6.15
Liquid Limited is a listed company in the retail industry. The financial statements are
currently being prepared for the year ended 31 December 20X3.
Liquid limited made a profit before tax of C30 000 in 20X3 (20X2: C20 000 and 20X1:
C14 000)
Dividend income received during the year was CIO 000 (20X2:C10 000 and
20X1:C10 000)
Information relating to property plant and equipment

20X0
70 000
90 000
Carrying amount
Tax base
20X1
64 000
70000
20X2
48 000
50 000
20X3
36 000
30 000
There are no other temporary or permanent differences other than those referred to above.
Liquid Limited has sufficient appropriate evidence available to suggest that they will be
able to utilise their deferred tax assets.
The normal income tax rate is constant at 30% and dividend income is taxed at 10%.
Required:
a) Calculate the current normal tax and deferred normal tax.
b) Prepare the tax-related journals for the years ended 31 December 20X1, 20X2 and 20X3.
c) Prepare the tax expense and deferred tax note for the years ended 31 December 20X1,
20X2 and 20X3.
Question 6.16
Reflection Limited is a listed company manufacturing mirrors. The financial results for the
year ending 20X3 are:
Profit before tax is C30 000 in 20X3 (20X2: C20 000 and 20X1: C14 000)
Dividend
income received during the year was CIO 000 (20X2:C10 000 and
20XLC20 000)
Information relating to property, plant and equipment

Carrying amount
Tax base
20X0
70 000
90 000
20X1
64 000
70000
20X2
48 000
50 000
20X3
36 000
30 000
* There is insufficient evidence for Reflection Limited to realise deferred tax assets.
The tax rate is constant at 30% and dividend income is taxed at 10%.
Chapter 6
70
Required:
a) Prepare a current normal tax computation and deferred tax calculation.
20X2 and 20X3.
Question 6.17
Beans Limited a listed company manufacturing coffee. Their financial results for the year
ending 20X3 are:
* Loss before tax is C20 000 in 20X3 and 20X2: CIO 000. Profit before tax is CIO 000 in
20X1.
Dividend income received during the year was C20 000 (20X2:C20 000, 20X1:C20 000).
An assessed loss of C100 000 is carried forward from 20X0.
Sufficient appropriate evidence was available to recognise deferred tax assets in 20X1. In
20X2, however, it did not appear probable that the tax loss would be able to be utilised.
In 20X3 evidence was once again available to recognise deferred tax assets in full.
The tax rate is constant at 30% whereas dividend income is taxable at 10%.
Assume that tax on dividend income can not be adjusted against unused tax losses and unused
tax credits.
Required:
a) Prepare a current normal tax computation and deferred tax calculation.
20X2 and 20X3.
Question 6.18
Avi Limited operates in the food industry. It commenced operations on 1 January 20X6. The
following information is available for its year ended 31 December 20X8:
Profit before tax for the year ended 3 1 December 20X8 is C650 000. This is arrived at
after correctly taking into account all the information below.
The tax assessment for 20X7 arrived during 20X8 and indicated taxable profits of
C650 000. Current normal tax of C195 000 was processed in 20X7.
rKanfjsr ft
71
A building was sold for C100 000. It was purchased for C200 000. On the date of sale,
I January 20X8. the building had a carrying amount of Cl 20 000 and a tax base of
Cl 30 000.
Plant was revalued to a fair value of C60 000 on 1 January 20X8. This is the first
revaluation of any item of property, plant and equipment to date. The plant originally
cost C100 000 and had a carrying amount on 1 January 20X8 of C50 000.
No transfers of the realized portion of the revaluation surplus to retained earnings are
made.
No other items of property, plant and equipment were revalued.

Depreciation is provided on the revalued property, plant and equipment. It had a
remaining useful life of 5 years on 1 January 20X8 {consistent with previous estimates of
useful life).
The tax authorities allows tax depreciation on the item of plant (revalued above) at 25%
p.a. on cost, but the item of plant already had a tax base of zero on 1 January 20X8.
Depreciation and capital allowances on all items of property, plant and equipment (other
than the revalued plant) were C50 000 and C35 000 respectively.
Dividend income of C20 000 was earned in the current year.
The following items appeared in the draft 31 December 20X8 statement of financial
position:
accrued income (taxed when earned) CIO 000
expenses prepaid (deductible when paid) C30 000

The following items appeared on the 31 December 20X7 statement of financial position:
accrued income (taxed when earned) C20 000

expenses prepaid (deductible when paid) CO
property, plant and equipment (including plant and buildings) C700 000
Property, plant and equipment (including plant and buildings) had a
31 December 20X7 of C680 000.
tax
base at
The current normal tax rate is 30% (20X7: 29%) where as dividend income is taxable at
10%.
There are no permanent or temporary' differences other than those evident from the
Required:
a) Calculate the deferred tax balance at 31 December 20X8 using the balance sheet approach.
b) Calculate the current tax expense for the year ended 31 December 20X8
Chapter 6
72
1
m
Question 6.19
The following is the trial balance of ABC Limited at 31 December 20X4:
TRIAL BALANCE AS AT 31 DECEMBER 20X4

Revenue from services
Dividend income
Profit on sale of plant (carrying amount: 30 000 on date of sale)
Depreciation on plant
Donations made (not deductible)
Finance charges (deductible)
Other expenses (deductible)
Dividends declared
Revenue received in advance: 1 Jan X4 (taxable in 20X3)
Rent expense prepaid: 1 Jan X4 (deductible for tax purposes in 20X3)
Share capital
Retained earnings: 1 Jan X4
Total non-current liabilities (including deferred tax liability)
Inventory
Debtors
Creditors
Bank overdraft
Dr/ (Cr)
(1510 000)
(5 000)
(25 000)
50 000
25 000
55 000
600 000
10 000
(5 000)
20 000
(200 000)
(320 000)
(150 000)
1 075 000
400 000
30 000
(40 000)
(10 000)
The trial balance was given to you by the director of ABC Limited. He studied accounting at
university twenty years ago and received a first in Accounting 101. When his accountant
threatened to resign two weeks ago due to low pay, he accepted the resignation thinking that
he would be able to process the outstanding journal entries himself.
Looking at the material he found in the accountants office after he had packed up and left the
building, he discovered that things seemed to be a lot more involved than in Accounting 101,
which was essentially focussed on basic book-keeping. He has requested you to resolve this
crisis for him since he has to have the draft financial statements ready for a directors meeting
in an hour.
Revenue from services includes revenue received in advance at 31 December 20X4 is

C15 000 (this is taxable in 20X4).
Rent expense includes rent expense prepaid at 31 December 20X4 C30 000 (this is
deductible for tax purposes in 20X4).
The taxable capital gain on the sale of plant is C7 500 and the original cost of Plant is C
50 000.
Tax depreciation granted as a deduction in 20X4 is C30 000.
* The tax base of property, plant and equipment was C800 000 at 31 December 20X4.
rhanter 6
73
Dividend of C30 000 were declared during 20X4 (CIO 000 as an interim and C20 000 as
a final dividend).
The final dividend has not yet been journalised.
Current normal tax in 20X3 was recognised at C110 000. The tax assessment of 20X3,
received during late 20X4, indicated total assessed normal tax of Cl20 000.
There was no movement in share capital during 20X4.
The rate of normal tax is 40% (20X3: 30%) and dividend is taxed @ 10%.
No journal entries relating to tax have yet been processed.
Required:
Process any outstanding journal entries for the year ended 31 December 20X4 (closing entries
are not required).
Question 6.20
Sozorsted Limited is a company that specializes in luxury bedding, including mattresses,
duvets, bed linen and pillows. It even offers a sleep clinic for customers wishing to have
sleep disorders diagnosed.
You are at a dinner party, where the accountant of Sozorsted Limited confesses to you that he
has been battling with their company tax calculations for a few days now and has asked you
to please take a look at the information he has been working with.
SOZORSTED LIMITED
TRIAL BALANCE AS AT 31 DECEMBER 20X4
Debit
Revenue from services
Dividend income
Donations made
Finance charges
Other expenses
Dividends declared
Revenue received in advance:
1/1/X4
Rent expense prepaid: 1/1/X4
Share capital
Retained earnings: 1/1/X4
Total non-current liabilities
Inventory
Debtors
Creditors
Bank overdraft
(carrying amount: C30 000 on

date of sale)
(not deductible for tax purposes)
(deductible for tax purposes)
(deductible for tax purposes)
Credit
1 510 000
5 000
25 000
50000
25 000
55 000
600 000
10 000
5 000
(taxable in 20X3)
(deductible for tax purposes in

20X3)
20 000
200000
320000
150 000
(including deferred tax liability)

1 075 000
400 000
30 000
2 265 000
Chapter 6
40000
10 000
2 265 000
74
II*
m

Revenue from services received in advance
taxable in 20X4).
at
31 December 20X4 is C15 000 (this is
Rent expense prepaid at 31 December 20X4 is C30 000 (this is deductible for tax
purposes in 20X4).
The tax base of the plant on date of sale was CIO 000.
Tax depreciation on plant granted as a deduction in 20X4 is C30 000.
The tax base of property, plant and equipment was C800 000 at 31 December 20X4.
There was no movement in property, plant and equipment during 20X4 other than is
evident from the information provided.
There was no movement in share capital during 20X4.
Dividends of C30 000 were declared during 20X4 (CIO 000 was declared ion 15 May
20X4 as an interim dividend and C20 000 was declared on 29 December 20X4 as a final
dividend).
The final dividend has not yet been journalized.
Current normal tax in 20X3 was recognized at Cl 10 000. The tax assessment of 20X3,
received during late 20X4, indicated total assessed normal tax of C120 000.
The rate of normal tax is 30% (20X3: 40%).
No journal entries relating to tax have yet been processed.
Apart from any deferred tax liabilities, the only other non-current liability is a long-term
loan.
There are no temporary or permanent differences other that those evident from the
There are no items of other comprehensive income in 20X4.
Required:
Disclose the above information in the financial statements of Sozorsted Limited for the year
ended 31 December 20X4 in accordance with IFRSs. Only the following notes are required:
Taxation
Deferred tax
Comparatives are only requiredfor the deferred tax note.
Chanter 6
75
<
Chapter 6
76
Accounting policies, changes in accounting

_ estimates and errors
Chapter 7
Accounting policies, changes in accounting estimates
and errors
Question
7.1
7.2
7.3
Key issues
Basic understanding of a change in estimate; a change in policy and errors
Discussion of a change in estimate vs a change in policy
Change in estimated useful life of equipment; using the re-allocation method:
a) Disclosure
b) Journal entries
7.4
7.5
7.6
7.7
7.8
7.9
7.10
7.11
Change in estimated residual values; using the re-allocation method: disclosure

and journals
a) residual value decreased
b) residual value increased
c) residual value increased above carrying amount
Change in estimated useful life, method and residual value of plant; using the re
allocation method; showing the tax effects: disclosure
Change in estimated useful life of vehicles; showing the tax effects; full
disclosure (including statement of financial position)
Correction of error made in a prior year (tax authorities will re-open prior tax
assessments); disclosure
a) and b): correction of error: measurement of inventory (tax authorities will re
open the relevant tax assessments)
c): change in accounting policy: measurement of inventory (tax authorities will
re-open the relevant tax assessments)
Correction of error made in a prior year, current tax and deferred tax
computation, disclosure (no need to re-open any tax assessment)
Correction of an error made in a prior year, a correction of an error made in the
current year and a change in accounting estimate (tax authorities will re-open
any affected tax assessment)
Correction of error: disclosure and correcting journals (no need to re-open any
tax assessment)
7.12
Correction of error: comparison of entries if error discovered in year when made

or in subsequent year
77
Is
__

estimates and errors
Question 7.1
The objective of this Standard is to prescribe the criteria for selecting and changing
accounting policies, together with the accounting treatment and disclosure of changes in
accounting policies, changes in accounting estimates and corrections of errors. (IAS 8, pi).
Required
a) i)
Define an accounting policy.

ii) Explain how to account for a change in accounting policy.
b) i)
Define an accounting estimate.

ii) Explain how to account for is a change in accounting estimate.
c) i) Define an error.
ii) What errors are covered by IAS 8?
iii) Explain how to account for an error.
Question 7.2
A change in the measurement basis applied is a change in an accounting policy, and is not a
change in an accounting estimate. When it is difficult to distinguish a change in an accounting
policy from a change in an accounting estimate, the change is treated as a change in an
accounting estimate. (IAS 8, p35).
Required
a) Explain the accounting treatment for a change from the residual balance method of
depreciation to the straight line method of depreciation.
b) Explain the accounting treatment for a change from the weighted average method to a
FIFO (first-in first-out) method for valuing the cost of inventory.
Question 7.3
Col Mustard is the managing director of Cluedo Limited, a company specialising in solving
murders. Cluedo Limited owns a large amount of very costly forensic equipment.
The forensic equipment was purchased on 1 April 20X1, at a cost of C600 000.
At that time it was determined that the equipment would be depreciated on a straight line
basis over a period of 6 years, which is consistent with the tax depreciation allowance
granted by the tax authorities.
On 1 April 20X3, the total life of the forensic equipment was re-estimated to be 10 years.
Cluedo Limited decided to adjust their records accordingly (using the re-allocation
method).
The tax rate has remained 30% since the companys inception.
Chapter 7
IS

Required:
a) Show how the above-mentioned information wouid be disclosed in the notes to the
financial statements of Cluedo Limited for the year ended 31 March 20X4.
Comparatives are required.
b) Show the depreciation journal entries necessary from the information provided above,
assuming:
i. Depreciation had not yet been processed for the year ended 31 March 20X4;
ii. Depreciation based on the old estimate had already been processed for the year ended
31 March 20X4.
c) Calculate the tax effect and journalise the related tax adjustment for the year ended
31 March 20X4.
Question 7.4
Dreamcoat Limited purchased a vehicle for C 10,000 on 1 January 20X0, on which date:
the vehicles residual value was estimated at C 1,000;
the useful life of the vehicle was expected to be 10 years.
Dreamcoat Limited uses the reallocation method to record changes in accounting estimates.
Required:
Using the reallocation method and assuming:
a) the estimated residual value decreased to C 600 during 20X6:
i. disclose the change in estimate note and the separately disclosable item:
depreciation, for the year ended 31 December 20X6;
ii. provide the journal entries necessary assuming that depreciation had not yet been
processed in the financial records for 20X6;
iii. provide the journal entries necessary assuming that depreciation based on the old
estimate had already been processed in the financial records for 20X6.
b) the estimated residual value increased to C 1,500 during 20X6:
i. disclose the change in estimate note and the separately disclosable item:
depreciation, for the year ended 3 1 December 20X6;
ii. provide the journal entries necessary assuming that depreciation had not yet been
iii. provide the journal entries necessary assuming that depreciation based on the old
79

c) the estimated residual value increased to C 5,000 during 20X6:
i.
ii.
iii.
disclose the change in estimate note and the separately disciosable item:
depreciation, for the year ended 31 December 20X6;
provide the journal entries necessary assuming that depreciation had not yet been
provide the journal entries necessary assuming that depreciation based on the old
Question 7,5
On 1 January 20X3 Meridian Limited purchased a plant for C 500,000. The company used
the reducing balance method for calculating depreciation at a rate of 20% per annum. The tax
authority grants a 40:20:20:20 allowance over four years.
During 20X6 the directors decided it was necessary to change to the straight line method of
calculating depreciation for plant. It was agreed that the remaining estimated life of the plant
was 3 years and the estimated residual value C 16,000 (previously this was nil).
This is considered to be a change in accounting estimate.

Meridian accounts for changes in estimates using the re-allocation method.
The company does not earn dividend income.
The draft statement of comprehensive income and statement of changes in equity had been
prepared for the year ended 31 December by the bookkeeper who had not been advised of the
directors decision.
MERIDIAN LIMITED
__
Revenue
Profit before depreciation
Depreciation - plant
Profit before tax
Income tax expense
Normal: current
Normal: deferred
20X6
C
800,000
20X5
380,200
300,000
(64,000)
236,000
(51,200)
329,000
(131,600)
rhin*Ai* 7
650,000
112,080
19,520
(94,400)
80,000
14,400
197.400
0
141,600
0
197,400
141.600
_____

_estimates and errors
_
MERIDIAN LIMITED
DRAFT STATEMENT OF CHANGES IN EQUITY
Retained earnings
C
Balance: 1 January 20X5
Dividends
Balance: 3 1 December 20X5
Dividends
Balance: 31 December 20X6
(40,000)
140,350
(10,000)
90,350
197,400
(15,000)
272,750
The tax rate has remained constant at 40%.
Required:
Prepare the statement of comprehensive income and relevant extracts from the statement of
changes in equity of Meridian Limited for the year ended 31 December 20X6, in compliance
with International Financial Reporting Standards.
Provide only the accounting policies, profit before tax, taxation and change in estimate notes
to the financial statements.
Question 7.6
Mild Limited owns vehicles (its only item of property, plant and equipment) with the
following original details:
C 600,000
Cost
Purchase date
Estimated useful life (estimated on date of purchase)
Depreciation to nil residual value
1/1/20X2
8 years
Straight-line
On 1 January 20X5, the total estimated useful life was revised to 6 years.
The company uses the re-allocation method to account for changes in estimates.
You are given the following statement of comprehensive income for the year ended
31 December 20X5, drafted before adjusting for the effects of the change in estimate:
MILD LIMITED
_
500,000
20X4
C
650,000
(180,000)
(300,000)
320,000
350,000
0
350,000
20X5

Income tax expense
0
320,000
The corporate tax rate is 30%.

81
___

Required:
a) Prepare the necessary journal entries assuming that depreciation had already been
processed in the 20X5 accounting records based on the old estimate.

b) Prepare the notes to the financial statements of Mild Limited for the year ended
31 December 20X5 in accordance with International Financial Reporting Standards.

c) Prepare the statement of comprehensive income of Mild Limited for the year ended
31 December 20X5 in accordance with International Financial Reporting Standards

d) Disclose property, plant and equipment in the statement of financial position of
Mild Limited as at 31 December 20X5 in accordance with International Financial
Reporting Standards
Question 7.7
Pear Limited is a small company involved in the car-hire industry. It owns a fleet of cars,
from small hatchbacks to luxury 4 X 4s. The company has links to a major airline whereby
clients can reserve their car at the same time as booking their airline ticket.
The company acquired a luxury 4X4 vehicle on 2 January 20X3 at a cost of C 600,000.
The vehicle has a useful life of four years with no residual value.
During the year ended 3 1 December 20X6, it was discovered that the cost of the 4 X 4
vehicle was expensed on acquisition.
The expense was incorrectly claimed as a deduction in 20X3. The tax authorities allow a
tax allowance on vehicles at 25% per annum on the straight line basis. The allowance has
not been claimed since 20X3 and the tax authorities are permitting the assessments for the
prior years to be reopened.
No entries have been made in the accounting records relating to this vehicle during the
current
year.
The corporate tax rate is 29% and has not changed since the vehicle was acquired.
Chaster 7

The trial balances of Pear Limited at 3 1 December 20X5 and 20X6 are shown below:
20X6
Motor vehicles
Accounts receivable
Bank
Accounts payable
Current tax payable
Retained earnings (at beginning of
year)
Profit before tax
Taxation
Debit
3,000,000
360,000
75,000
Credit
110,000
145,000
2,700,000
125,000
20X5
Debit
Credit
3,250,000
310,000
429,000
190,000
116,000
2,700,000
159,000
500,000
145,000
3,580,000
3,580.000
400,000
116,000
3,835,000
3,835,000
Required:
a) Prepare relevant extracts from the statement of comprehensive income and prepare the
retained earnings column of the statement of changes of equity of Pear Limited for the

b) Prepare the correction of error note to the financial statements at 31 December 20X6.
Question 7.8
Hot Ltd has recently discovered that inventory has been incorrectly valued using the weighted
average method (WA) instead of the first-in-first-out method (FIFO) for the past four years.
The effect of this error is as follows:
Year-end inventory balances
WA method (did use)

FIFO method (should have used)
20X7
C
15,000
18,000
20X6
C
14,000
15,000
20X5
C
12,000
14,000
20X4
C
10,000
11,000
The draft financial statements before correcting this error are as follows:
HOT LIMITED
_
20X7
C
1,200,000
Revenue
Cost of sales
Gross profit
Other costs
Profit before tax
Income tax expense
(420,000)
900,000
(350,000)
780,000
(220,000)
560,000
550,000
(200,000)
(235,200)
(136,500)
213,500
324,800
0
324,800
Chanter 7
20X6
C
350,000
0
213,500
S3
__

I
::
HOT LIMITED
Retained
earnings
C
67 500
213 500
281 000
324 800
605 800
Opening balance: 1/1/20X6

Total comprehensive income: 20X6
Closing balance: 31/12/20X6
Closing balance: 31/12/20X7
The error is considered to be material.
The tax authorities will be re-opening the tax assessments for all year/s affected. The normal
income tax rate is levied at 30%.
Required:
a) Prepare the journal entry that needs to be processed in the 20X7 financial year to correct
the error.
b) Prepare the statement of comprehensive income, statement of changes in equity, statement

of financial position and notes of Hot Ltd for the year ended 3 1 December 20X7, in
accordance with International Financial Reporting Standards.

c) Repeat part (b) above assuming that an error was not made but rather that the company
changed its accounting policy: the company previously used the weighted average method
when recording inventory movements and decided to change this policy to the first-infirst-out method.
The notes that purely support the statement offinancial position are not required.
Ignore earnings per share.
Question 7.9
Oranges Ltd is a company operating in the entertainment industry. The following draft
extracts of the statement of comprehensive income and statement of financial position have
been presented to you together with additional information that has not yet been taken into
account in the preparation thereof:
ORANGES LTD
DRAFT EXTRACTS FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X3 _ _
20X3
20X2
C
c
Profit before tax
300 000
250 000
(80 000)
(70 000)
Income tax expense
220 000
180 000
0
0
Total comprehensi ve income
220 000
180000
Chapter 7
84
f
4

ORANGES LTD
DRAFT EXTRACTS STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X3
20X3
20X2
c
C
1,391,500
1,217,000
152,000
176,500
- Machinery carrying amount
1,065,000
1,215,000
- Equipment carrying amount
1,365,000
Retained earnings
Deferred tax liability
1,000,000
170,000
?
140,000
?
150,000
20X1
1,566,000
201,000
Machinery:
During 20X3, the company changed the estimated residual value of its machinery from C
5,000 to C 10,000 and changed the total expected useful life of machinery from 10 years
to 15 years. The machinery had all been purchased on 1 January 20X0 at a cost of C
250,000. Depreciation is provided on the straight line method.
Equipment:
During 20X3, it was discovered that the cost of an item of inventory sold on 1 July 20X1
(cost: C 300,000), had been incorrectly debited to equipment. The taxable profit and tax
base were correctly calculated in all years affected.
The cost of equipment was otherwise C 1,200,000, all having been purchased on
1 January 20X0.
The company depreciates equipment at 10% per annum to nil residual values
(apportioned for part of a year where appropriate) using the straight-line basis.
Other general information:
The opening retained earnings as at 1 January 20X2 was C 1,000,000. There were no
dividend declarations or transfers to or from retained earnings during 20X2 and 20X3.
There was no other movement in property, plant and equipment other than that which is
evident from the information provided. Other than the incorrect debit, all movements in
the carrying amount of property, plant and equipment since date of purchase relate to
depreciation.
The normal income tax rate is 30%,
Required:
a) Calculate the effect of the change in estimate using the re-allocation method.
Detailed workings are required.
Chapter 7
85
1
pi
S.'
''
*'

b) Disclose the following:
the change in estimate note;
the correction of error note
the statement of comprehensive income;

the retained earnings in the statement of changes in equity; and
the statement of financial position for the year ended as at 31 December 20X3 in
conformity with IFRSs.

c) Show all the journal entries that would need to be processed to effect:
the change in accounting estimate; and

the correction of the error.
Assume that the adjustments may only be posted in 20X3.
Question 7.10
The following draft financial statements relate to Truth Limited:
TRUTH LIMITED
Revenue
Cost of sales
Gross profit
Other income
Other costs
Income tax expense
20X6
C
3 810 000
(2 280 000)
1530000
250 000
2 600 000
(1 160 000)
1 440 000
100 000
(890 000)
(750 000)
20X5
890000
790 000
(252 000)
(207 000)
638 000
0
638 000
583 000
0
583 000
TRUTH LIMITED
Retained
earnings
C
Balance - 1 January 20X5

Total comprehensive income - 20X5
Balance - 3 1 December 20X5
Total comprehensive income - 20X6
Balance - 31 December 20X6
900 000
583 000
1 483 000
638 000
2 121 000
Chapter 7
86

Included in other income are the following

Dividend income (exempt)
Profit on expropriation of land (exempt)
20X6
C
100 000
150 000
20X5
C
100 000
0
The capital gain on the expropriation of land, as calculated in terms of the capital gains tax
legislation, was zero. There were no tax allowances on the land.
Included in other costs are the following items:

Loss of inventory (see below)
Directors remuneration
Depreciation on machinery (see below)
Depreciation on vehicles (see below)
Loss on sale of land (not deductible)
20X6
C
130 000
150000
143 750
30 000
200 000
20X5
c
0
150 000
100 000
30 000
0
* The inventory was destroyed in a tornado. The inventory was not insured. The loss is tax
deductible.
The bookkeeper erroneously capitalised advertising expense amounting to C 750 000 to

the machinery account on 1 June 20X6. All machinery was purchased onIMay 20X4 at a
cost of C 1 000 000. Depreciation on machinery is calculated at 10% per annum on the
straight-line basis to nil residual values. The bookkeeper has not yet corrected this error.
The same error had been made when calculating the tax base and taxable profit for the
year. Machinery is used in the manufacture of inventory. There was no inventory on
hand at year end.
During 20X6, it was decided to change the rate of depreciation on vehicles from straightline over 10 years to straight-line over 5 years (in both cases, to nil residual values). All
vehicles were purchased on 1 July 20X3 at a cost of C 300 000. This change has not yet
been accounted for. The company uses the re-allocation method to adjust for changes in
estimates. The vehicles are used to deliver inventory to customers.
On receipt of the 20X5 tax assessment, it was discovered that the bookkeeper had
erroneously included VAT of C 300 000 in revenue in 20X5 and that, as a result, the
current tax in 20X5 had been incorrectly estimated by the accountant. The bookkeeper
has not yet corrected the error. The tax authorities will re-open the tax assessment,
* The tax authorities allow tax depreciation as follows:
- machinery: 20% per annum straight-line (apportioned for part of a year)
- vehicles: 20% per annum straight-line (not apportioned for parts of a year)
The normal corporate tax rate remained constant at 30%
* There are no other
temporary differences other than those indicated by the information
presented.
87

Required:
a) Prepare all journal entries necessary from the information presented above.
b) Prepare the statement of comprehensive income, statement of changes in equity and
related notes of Truth Limited for the year ended 31 December 20X6 in accordance with
International Financial Reporting Standards. Accounting policies are not required.
Question 7.11
Autumn Ltd manufactures slot machines for the gaming industry. On 1 January 20X1,
Autumn Ltd bought the rights to manufacture Guppy slot machines at a cost of C 600 000.
The cost was recognized as an intangible asset and was amortised over its expected finite life
of 20 years to a nil residual value using the straight-line method.
During 20X4 it was discovered, however, that Autumn Ltd had purchased the legal rights for
a period of only 15 years. The effect of this information is considered to be material. The tax
authority allows Autumn Ltd to deduct the cost of the rights over a period of 10 years on the
straight-line method.
The following is an extract of the draft statement of changes in equity for the year ended
3 1 December 20X4, before making any necessary corrections.
AUTUMN LIMITED
STATEMENT OF CHANGES IN EQUITY
Retained
earnings
C
800 000
270 000
1 070 000
370 000
1 440 000

Balance: 3 1 December 20X4

The normal tax rate has remained 30% since inception of the company.
Required:
a) Show the correcting journal entries.
b) Disclose the following in the financial statements of Autumn Ltd for the year ended
3 1 December 20X4 in accordance with International Financial Reporting Standards:
Correction of error note;

ii. Statement of changes in equity; and
iii. Statement of financial position.
i.
Question 7.12
Truthful Limited is a company operating in the engineering sector. The company purchased
its only item of equipment on 2 January 20X1 at a cost of C 100 000.
Chapter 7
R8
ii&i&k
k:.:
tt
1
i;

During the 20X2 financial year, it was discovered that the equipment purchased in January
20X1 was recorded as a repair expense.
The profit before depreciation and repair expenses for the 20X1 financial year amounted to C
2000 000.
The corporate tax rate is 30%.
Part A
The company provides for depreciation at 10% per annum on the straight-line basis. The tax
authorities allow a tax depreciation allowance of 20% per annum, also on the straight-line
basis.
The incorrect information was also submitted to the tax authorities.
Required:
a) Prepare the correcting journal entries that are processed in the year 20X2.
b) Prepare the correcting journal entries that would have been processed if the error was
discovered at the end of the 20X1 year.

Part B
Same information as in part A, except
The company provides for depreciation at 10% per annum on the straight-line basis. The
tax authorities allow a tax depreciation allowance of 10% per annum, also on the straight-
line basis.
Required:
discovered at the end of the year 20X1.

Part C
Same information as in part A, except
The company provides for depreciation at 10% per annum on the straight-line basis. The
tax authorities allow a tax depreciation allowance of 10% per annum, also on the straightline basis.
The correct information was submitted to the tax authorities.
Required:
discovered at the end of the year 20X1.
Chanter 7
89
Jf

Chapter 7
90
Earnings per share
[Part 2|
Chapter 8
Earnings per share
Question
Key issues
Section A: Basic and Headline Earnings per share

8.1
Understanding EPS relating to share issues not for value / capital profits,
earnings compared to dividends
8.2
Share issue for cash followed by capitalization issue, arrear preference dividends
Basic EPS / DPS, share issue for cash
8.3
Basic EPS, capitalization issue
8.4
Basic EPS / DPS, share split
8.5
Basic EPS, rights issue (i.e. less than market value)
8.6
8.7
Basic EPS, issue at market value, rights issue (i.e. less than market value), share
split: disclosure over 3 years
Basic EPS, issue at market value, rights issue, capitalization issue: disclosure
8.8
over 3 years and journals
Basic EPS / DPS for ordinary and participating preference shares, rights issue
8.9
8.10
Basic EPS, with an error and a share split
8.11
Basic EPS, with a capitalization issue, share consolidation
Section B: Basic and Diluted Earnings per share
Basic and diluted earnings per share: convertible debentures
8.12
8.13
8.14
8.15
8.16
8.17
8.18
8.19
Basic and diluted earnings per share: options and a share issue
Basic and diluted earnings per share: convertible debentures and a rights issue
Basic and diluted earnings per share: convertible preference shares and options,
with a rights issue
with a rights issue and discontinued operation.
with a rights issue, anti-dilution and discontinued operation.
Basic and diluted earnings per share
Basic and diluted earnings per share
***** 8
91
Question 8.1
Earnings per share
You have recently been appointed the accountant of Cleopatra Pet Products Limited. Your
first assignment was to draw up the financial statements of the company for the year ended
30 September 20X4. This you have done, including earnings and dividends per share.
The Managing Director, instead of praising you for your technical expertise as you expected,
wants to know why you changed last years number of shares when calculating the earnings
per share for the comparative statement of comprehensive income. He points out accusingly
that last years statement of financial position reflects only 100 000 ordinary shares and that
the 200 000 shares that you have reflected have only been in issue since half-way through the
current year. Furthermore, he wants to know why you included the profit of C80 000 made
on the sale of investments during the year. He believes that this should be excluded.
Required:
a) Explain to the managing director all the circumstances under which the previous years
comparative figures for earnings per share should be restated. Give reasons why the
restatement is necessary in each case.
b) Explain why the profit on the sale of investments was included in the amount of earnings
used for the earnings per share calculation.
c) Explain why the earnings per share figure is a better indicator of performance than
dividends per share

profit after tax
Question 8.2
Aussie Limited was incorporated in 20X0 with an issued share capital of 150 000 9%
cumulative preference shares of Cl each and 150 000 12% non-cumulative preference shares of
Cl each and 300000 ordinary shares of Cl each. The preference shares are non-redeemable.
The only changes to this structure were a new issue of 50 000 ordinary shares at a fair value of
C1.50 on 1 January 20X2 and a capitalisation issue of 1 share for every 5 held on 15 June 20X3.
The abridged statement of comprehensive income and statement of changes in equity of the
company for the years ended 30 September 20X2 and 20X3 are as follows:
AUSSIE LIMITED
STATEMENT OF COMPREHENSIVEINCOME
FOR THE YEAR ENDED 30 SEPTEMBER
20X3
C
500000
Profit after tax

Minority interest
(25 000)
475 000
0
475 000
Chapter 8
20X2
c
10000
(20000)
(10000)
0
(10000)
92
&armnKa Mv
AUSSIE LIMITED
FOR THE YEAR ENDED 30 SEPTEMBER
Retained earnings
20X3
20X2
C
c
940 000
950 000
475 000
(10000)
Opening balance
Capitalisation issue of ordinary'
shares
Dividends paid - 30 Sept 20X3
Ordinary shares
9% preference shares
12% preference shares
Closing balance
(70000)
(150 000)
105 000
27 000
18000
0
0
0
0
1 195 000
940 000
The profit before tax in 20X2 includes a profit on disposal of land of C50 000.
The profit before tax in 20X3 includes a loss on sale of land of C70 000. This loss may be
deducted from future capital gains in order to reduce future tax. At the end of 20X3, the
company did not expect any future capital profits and therefore no deferred tax was provided on
the capital loss of C70 000.
The normal tax rate for both years was 29%.
Required:
Calculate the earnings per share and dividends per share and show how they would be disclosed
in the financial statements of Aussie Limited for the year ended 30 September 20X3 in
Comparatives and notes to EPS required.
Question 8.3
The following information relates to Mitch Limited for the year ended 31 December 20X1:
MITCH LIMITED
EXTRACTS FROM PRE- ADJUSTMENT TRIAL BALANCE AT 31 DECEMBER
20X1
20X0
20X1
Debit/(Credit) Debit/(Credit)
(80 000)
(100 000)
5 000
5 000
Preference dividend declared - 31/12
6 000
10 000
Ordinary dividend declared - 31/12
Chapter 8
93
li-KS : Graded Questions
Earnings per share
I
Share capital details are as follows:
Ordinary share capital balance at 1/1/20X0: C200 000 (C0.20 par value)
10% non-cumulative non-redeemable preference shares balance at 1/1/20X0: C50 000

(Cl par value)
500 000 ordinary shares were issued on 3 1/3/20X lat the market value of C0.20 per share.
Required:
Prepare extracts from the statement of comprehensive income and statement of changes in
equity of Mitch Limited for the year ended 31 December 20X1 in terms of International
Only the notes relating to EPS are required.
Question 8.4
The following information relates to Miles Limited for the year ended 3 1 December 20X1:
MILES LIMITED
20X1
C
503 000
Profit before tax

Income tax expense
Profit after tax
Preference dividends declared
Ordinary dividend declared
303 000
20X0
C
403 000
(180 000)
223 000
(3 000)
(30000)
(3 000)
(30 000)
270 000
190000
(200000)
The balances in equity at 1 January 20X0 comprised:
1 000 000 ordinary shares of C0.20 each;

10 000 10% non-cumulative non-redeemable preference shares of C3 each;
Share premium of C290 000; and
Retained earnings of C60 000.
terms of an agreement with the bank the company has undertaken to have a
capitalisation issue in order to capitalise excess reserves. In accordance with this
agreement, there was a capitalisation issue of 1 for every 2 shares held on 1 July 20X1.
* In
Chapter 8
94
Earnings per share

L '
Required:
Prepare extracts from the statement of comprehensive income, statement of changes in equity
and related notes of Miles Limited in terms of International Financial Reporting Standards for
the year ended 3 1 December 20X 1.
Question 8.5
LOYAL LIMITED
EXTRACTS FROM PRE-ADJUSTMENT TRIAL BALANCE
AT 31 DECEMBER
_
20X1
Non-cumulative preference dividend paid 3 1/12/20X1
Ordinary dividend declared 31/12/20X1
20X0
Debit/(Credit)
DebitZ(Credit)
(250 000)
(280 000)
3 000
10 000
3 000
12 000
The balances in equity at 1 January 20X0 comprised:
100 000 ordinary shares of Cl each.

20 000 15% non-cumulative non-redeemable preference shares of Cl each.
Retained earnings of 020 000.
There was a share split on 1/7/20X1 in which every 1 ordinary share became 2 shares.
Required:
equity of Loyal Limited in terms of International Financial Reporting Standards for the year
Only the earnings per share note is required.
95
I
3
Earnings per share
Question 8.6
ROGER LIMITED
Profit before tax

Income tax expense
Ordinary dividend declared
Preference dividend declared
Retained earnings - beginning of the year
Retained earnings - end year
20X8
C
750 000
20X7
c
730 000
(400 000)
(300000)
350 000
430 000
(40000)
(32 000)
(30 000)
(32 000)
278 000
568 000
846 000
368 000
200 000
568 000
The companys share capital at 31 December 20X8 was as follows:
C500 000 ordinary shares of par value of C0.50 each.

200 000 8% non-cumulative non-redeemable preference shares of C2 each.
On 30 September 20X8, the company announced a rights issue of 1 ordinary share for
every 3 shares held at a price of C2.20. The market price at this date was C2,50. All the
shareholders took up the offer on this date. Prior to this date all shares issued were issued
at par value.
Required:
equity of Roger Limited in terms of International Financial Reporting Standards for the year
Comparatives and the earnings per shore note are required.
Round off all earnings per share calculations to the nearest two decimal places.
Question 8.7
The following are the details of the share movements of a company called Anne Limited:
There were 10 000 shares in issue throughout 20X0;
10 000 shares were issued on 30 June 20X1;
10 000 shares were issued on 30 September 20X2;
Chapter 8
96
'
II
Earnings per share
There was a rights issue on 30 June 20X3, offering 2 shares for every 3 shares held on
this date at a strike (issue) price of CIO each when the market price was 05/ share. All
shares were taken up;
Shares were split on 30 September 20X3 (splitting 2 shares into 3 shares).
There were 100 000 CIO, 20%, non-redeemabie, non-cumulative preference shares (i.e.
treated as equity) in issue throughout the three years. The preference dividends were
declared in each of the three years.
5*
Details of Anne Limiteds profits are as follows:

Profit for the year
20X3
700 000
20X2
900 000
20X1
800 000

-
Required:
Calculate and disclose earnings per share in the financial statements for the year ended:
a) 3 1 December 20X3
b) 31 December 20X2
c) 31 December 20X1 (no comparatives are required for part (c)).
Question 8.8
Thomas Limited was incorporated on 1 January 20X2. An extract of its previous years
statement of financial position follows:
EXTRACTS OF THE STATEMENT OF FINANCIAL
POSITION AS AT 31 DECEMBER 20X3
20X3
C
270 000
100 000
30 000
250 000
EQUITY
Preference share capital: C2 shares
Share premium
Retained earnings
20X2
C
100 000
100 000
10 000
100000
Information regarding its share capital:
Authorised share capital:

400 000 ordinary shares of Cl each; and
300 000 10% non-redeemable, non-cumulative preference shares of C2 each.
Preference share capital:
50 000 preference shares were issued on 1 January 20X2.

Preference dividends are always declared and paid on 30 December of each year.
Ordinary share capital:

100 000 ordinary shares were issued on 1 January 20X2.
* 170 000 ordinary shares were issued on 30 June 20X3.
rhnlf>r R
97
Earnings per share
10 000 ordinary shares were offered to existing shareholders at C6 each on 30 May 20X4,
when the market price was C9 each. All 10 000 shares offered were taken up on this day.
On 30 November 20X4, there was a capitalisation issue of 2 ordinary shares for every 5
shares in issue. The capitalisation issue utilised the share premium as far as is possible.
The directors agreed that the impact of the capitalisation issue on the retained earnings
should be minimised as far as possible.
Other information:
Share issue expenses were 15 000 during 20X4.

The profit for 20X4 was C180 000, 20X3 was C150 000 and 20X2 was 100 000.
There are no other share issues or reserves other than those mentioned above.
Required:
a) Disclose earnings per share in the statement of comprehensive income and notes to the
financial statements of Thomas Limited for the year ended 3 1 December 20X4, showing
both 20X3 and 20X2 as comparatives.
b) Calculate the basic earnings per share as it would have been disclosed in the financial
statements for the year ended 3 1 December 20X3.
c) Show all journal entries relating to the transactions mentioned above for the year ended
31 December 20X4
Question 8.9
MATTHEW LIMITED
EXTRACTS FROM PRE-ADJUSTMENT TRIAL BALANCE
AT 31 DECEMBER
__
Profit after tax
Fixed non-cumulative non-redeemable preference dividend paid 31/12

Fixed non-cumulative non-redeemable participating preference
dividend paid - 31/12
Ordinary dividend paid - 31/12
20X1
C
320 000
20X0
C
290 000
4 500
4 500
4 000
4 000
10 000
The following information was extracted from the statement of financial position and related
notes:
Issued share capital consists of:

Ordinary shares of 0.70 par value: 1/1/20X1
5% non-cumulative non-redeemable preference shares of Cl each:
1/1/20X1
* 20% non-cumulative non-redeemable participating preference shares
of C0.50 each: 1/1/20X1 (these shares participate to the extent of 2/5
of the ordinary dividend declared)
rhairfw $
C
700 000
90 000
20 000
Earnings per share
There was a rights issue on 30/9/20X1, in terms of which, each ordinary shareholder was
granted the right to purchase one share for every four shares held at par value. All the
shares offered were taken up on that day. The market price on this day was C1.40 per
share.
Required:
Disclose the above, in accordance with International Financial Reporting Standards, in the
financial statements for the year ended 31 December 20X1.
Question 8.10
Hubbard Limiteds bookkeeper drew up the following draft statement of comprehensive
income for the year:
HUBBARD LIMITED
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20X6 _
Sales
Cost of sales
Gross profit
Other expenses
Interest received
Profit before tax
Income tax expense - current
20X6
C
500000
(250 000)
20X5
400 000
(200 000)
250 000
200000
(110 000)
(103 000)
7 000
150000
0
3 000
100 000
(40 000)
(35 000)
110 000
0
110 000
65 000
0
65 000
3 000
The following are extracts from the draft statement of changes in equity for the year ended:
HUBBARD LIMITED
FOR THE YEAR ENDED 30 JUNE 20X6
Opening balance
Transfer to non-distributable reserves
Ordinary dividends
Preference dividends
Closing balance
Retained earnings
20X6
20X5
C
c
81000
25 000
110 000
65 000
(7 000)
0
(10000)
(2 000)
(5 000)
(4 000)
172000
81000
Earnings per share
Before the 20X6 financial statements were published, it was discovered that a deduction
of CIO 000 had been omitted from the 20X5 current tax calculation. The effect of the
errors is material All the information needed to report the correction of the error is
available without undue cost or effort.
The company had operated with an ordinary share capital of C100 000 (200 000 shares of
C0.50 each) for a number of years. On 31 March 20X5, 50 000 new shares were issued at
a premium of CO. 10 each. On 1 January 20X6, the directors decided to split the share
capital into shares of CO. 25 in order to improve the shares marketability.
The dividends paid to the ordinary shareholders were declared as follows:

20X6
4 000
6 000
10 000
31 December
30 June
20X5
5 000
5 000
The preference dividends in 20X5 include C2 000 dividends owing in respect of 20X4. A
dividend was not declared in 20X4 as a loss was incurred in that year.
Required:
In so far as the information is available, prepare the statement of comprehensive income and
statement of changes in equity of Hubbard Limited for the year ended 30 June 20X6 in terms
of International Financial Reporting Standards.
The only notes required are in respect of earnings per share and the error.
Question 8.11
Trini Limited operates in the retail sector and is listed on the KSE. The following extract of
information is available for its financial year ended 31 December 20X8.
20X7
TRINI LIMITED
STATEMENT OF FINANCIAL POSITION

C
Equity and Liabilities
Issued ordinary shares of C2 par value each
Share premium
The correctly calculated net profit after

C2 125 000)"
1000 000
200 000
tax
amounted to C3 220 000 for 20X8 (20X7:
Earnings per share
B
:
On 30 April 20X8, Trini Limited issued 125 000 shares at their market value of C5 per
share. Another issue of 30 000 shares took place on 30 November 20X8 at their market
value of C7 per share. A further issue of 30 000 shares took place on 20 January 20X9 at
their market value of C7 per share.
Trini limited had a rights issue on 30 May 20X8, the terms of which were as follows:
One share was offered at an exercise price of C3 for every 4 shares held on 30 May
20X8. the market price immediately before the issue was C5 per share. All shares
offered were taken up.
On 31 October 20X8, Trini Limited consolidated its shares such that every 5 shares were
consolidated into 2 shares.
An ordinary dividend of C275 000 on 30 December 20X8. On 29 December 20X7 the

ordinary dividend declared was C200 000.
Required:
Disclose the earnings per share in the Statement of comprehensive income and in the related
note to the financial statements of Trini Limited for the year ended 31 December 20X8 in
accordance with IFRS.
Question 8.12
Sprog Limited had a profit for the year ended 20X5 of C20 000 000, Details regarding the
companys share capital and potential share capital at 31 December 20X5 are overleaf:
There are 1 000 000 000 authorised ordinary shares (with a par value of C4.50), of which
10% are in issue.
debentures in issue. These debentures may be converted

There are 500 000 convertible
a ratio of 100 ordinary shares for every 1 debenture held, (at the
into ordinary shares in
option of the debenture holder), on the 31 December 20X8. Any debentures not
converted at this date will be redeemed. Finance charges on these debentures of
Cl 505 000 were incurred during 20X5.
There were no movements in share capital during 20X5.

No dividends were declared in 20X5.
Required:
Disclose earnings per share in Sprog Limiteds statement of comprehensive income for the
Ignore tax.
Comparatives and notes to the financial statements are not required.
I"51* cm
101
Earnings per share
Question 8.13
:
Details of Laser Limiteds profits (or losses) for 20X5 and 20X4 are as follows:
Profit for the year: C125 000 (20X4: loss of 50 000).
Details of Laser Limiteds share capital and potential share capital include the following:
At 1 January 20X4 there were 100 000 ordinary shares with a par value of Cl .75 in issue.
On 30 November 20X4, 12 000 ordinary shares were issued at a premium of C0.25 per
share. There have been no other issues since 30 November 20X4.
There are 25 000 options in issue entitling the option holder to 1 ordinary share at a strike
price of C2.00 per share, (the average market price of an ordinary share for 20X5: C2.75).
Other information includes:
An interim ordinary dividend of C0.04 per share was declared and paid on the
30 June 20X5. On 15 December 20X5 a final ordinary dividend of C2 800 was declared.
No dividends were declared in 20X4 due to the loss made in 20X4.
Normal company tax is levied at 35%.
Required:
Disclose earnings per share for the year ended 31 December 20X5 in the Laser Limiteds
statement of comprehensive income.
Notes to the financial statements are not required.
Question 8.14
Rebel Limited had the following draft statement of comprehensive income:
REBEL LIMITED
FOR YEAR ENDED 31 DECEMBER 20X5 (DRAFT)
Basic earnings per share

Basic diluted earnings per share
Dividends per share
20X5
C
20X4
0.20
0.20
0.05
1.75
1.75
0.00
The financial accountant of Rebel Limited resigned shortly before year end, leaving the
bookkeeper to draw up the draft annual financial statements. Numerous errors have been
made by the bookkeeper. The errors are as follows:
The preference shareholders receive a fixed dividend of C5 000 a year. This has been
ignored in the calculation of earnings per share.
Chapter 8
102
kWS
Earnings per share
During further investigations, the bookkeeper revealed that no additional work had been
done for dilutive earnings per share as the bookkeeper was under the assumption that the
calculations were highly complex and that in their small business the figures would be the
same as basic earnings per share.
In your investigations you came across the following working paper:
11
Actual 20X5
1 January
Rights issue: for value portion
Sub-total
Rights issue: not for value portion
31 December
20 000
60 000
80 000
20 000
100 000
Weighted
20X5
20 000
60 000
80 000
20 000
100000
Adjusted
20X4
20 000
0
20 000
0
20 000
At 1 January 20X4 there were 20 000 ordinary shares in issue. The rights issue (which
took place on the 30 June 20X5) was on a 4 for 1 basis, at a strike price of Cl.50 per
share. The market value per share immediately before the rights issue was C2.00.
The following potential ordinary shares are in issue: convertible debentures (convertible
the option of the debenture holders). These are convertible into 5 000 ordinary shares
on 31 December 20X7. If not converted, the debentures will be redeemed on
31 December 20X7. Finance costs of C100 are incurred annually on these debentures.
The convertible debentures were issued half way through 20X4.
at
No dividends were declared in 20X4, but in the following financial year (early 20X5,
before the financial statements were authorised and issued) a dividend of C0.03 per share
was declared. Other dividend declarations in 20X5 included an interim dividend of C0.05
per share (declared in June 20X5) and a final dividend of C0.02 per share (declared in
December 20X5).
Required:
Recalculate the correct earnings per share figures and disclose them in the statement of
comprehensive income of Rebel Limited for the year ended 31 December 20X5.
ignore tax. Notes are not required.
Question 8.15
The following relates to Dabchick Limited for the year ended 31 December 20X5:
Profit for the year C200 000 (20X4: C135 000).

On 1 January 20X4 there were 250 000 ordinary shares each with a par value of C5.00 in
issue. On the 30 September 20X4 there was a rights issue on a basis of 1 ordinary share
issued for every 5 already held at a price of C6.00. The market value of the ordinary
shares immediately before the rights issue was C7.50 per share. On 31 May 20X5 there
was an issue of 50 000 ordinary shares at market price (C5 per share).
There are 25 000 options in existence, each of which allows the holder to acquire four
shares at a strike price of C7.00 per share. The options have already vested but will only
expire in many years to come. The average market price per ordinary' share for 20X4 and
20X5 was C8.00. These options were in existence throughout 20X4 and 20X5.
Chapter 8
103
: Graded Questions
Earnings per share
Preference shares in issue are convertible (at the option of the preference shareholders)
into 50 000 ordinary shares on 31 December 20X7. If not converted, the preference shares
will be redeemed on 31 December 20X7. Dividends of Cl 000 are incurred annually on
these preference shares (these have been correctly accounted for as finance charges). The
preference shares were in existence throughout 20X4 and 20X5.
s;
Normal tax is levied at 30%.

Required:
Disclose earnings per share in the financial statements of Dabchick Limited for the year ended
31 December 20X5.
Question 8.16
The following relates to Late Night Limited for the year ended 3 1 December 20X5:
Profit
for the year C500 000 (20X4: C337 500). This profit includes a profit from
discontinued operations (after tax) 52 500 (20X4: CO).
shares immediately before the rights issue was C7.50 per share. On 31 May 20X5 there
expire in many years to come. The average market price per ordinary share for 20X4 and
20X5 was Cl2.00, These options were in existence throughout 20X4 and 20X5.
into 50 000 ordinary shares on 31 December 20X7. If not converted, the preference
shares will be redeemed on 31 December 20X7. Dividends of Cl 000 are incurred
annually on these preference shares (these have been correctly accounted for as finance
charges). The preference shares were in existence throughout 20X4 and 20X5.
Required:
Disclose earnings per share in the financial statements of Late Night Limited for the year
Accountingpolicy notes are not required.
Chapter 8
104
i
}
Earnings per share
Question 8.17
The following relates to Early Morning Limited for the year ended 31 December 20X5:
Profit for the year C500 000 (20X4: C337 500). This profit includes a profit from a
discontinued operation (after tax) of C52 500(20X4: CO).
shares immediately before the rights issue was C7.50 per share. On 3 1 May 20X5 there
expire in many years to come. The average market price per ordinary share for 20X4 and
20X5 was 12.00. These options were in existence throughout 20X4 and 20X5.
into 500 ordinary shares on 31 December 20X7. If not converted, the preference shares
will be redeemed on 31 December 20X7. Dividends of Cl 000 are incurred annually on
these preference shares (these have been correctly accounted for as finance charges). The
preference shares were in existence throughout 20X4 and 20X5.
Required:
Disclose earnings per share in the financial statements of Early Morning Limited for the year
Accountingpolicy notes are not required.
Question 8.18
The following information is available for Klingbros Limited at 3 1 December 20X8.
Note
Profit after tax

Issued ordinary shares of Cl each
10 000 C20 12% participating preference
shares
75 000 C3 7% convertible preference shares
Options
40 000 C4 10% convertible debentures
20X8
650 000
1
?
200 000
2
6
7
225 000
N/A
16 000
20X7
C
550 000
?
200 000
225 000
N/A
20X6
C
400 000
683 750
200 000
N/A
1. The participating preference shares are non-redeemabie and non-cumulative, and

participate to the extent of C1 for every C11 paid to ordinary shareholders.
2. The convertible preference shares (recognised as a liability) are cumulative and
convertible at the option of the preference shareholder into ordinary shares at a rate of
three ordinary shares for every four convertible preference shares on 31 December 20X8.
Chapter 8
105
Earnings per share
Finance costs deducted in arriving at profit after tax amount to C20 000. The preference
dividend was declared in 20X8 together with the 20X7 preference dividend (recognised as
finance costs on the preference share liability).
3. Options to acquire 67 500 ordinary shares in Klingbros Ltd after 1 January 20X9 at a
strike price of C4 per share were issued on 1 January 20X8. The average market price of
the shares during 20X8 was C9 per share.
4. Klingbros Limited purchased a majority holding in Happy Limited on 1 May 20X7. Part
of the purchase price was settled by the issue of 165 000 ordinary shares of Klingbros
Limited on that date. A further 25 000 shares are contingently issuable upon Happy
Limited generating total profits of C50 million over five years. Happy Limiteds profit
for the year ended 31 December 20X8 was C30 million (20X7: C30 million).
5. 40 000 10% convertible debentures of C4 each were issued. These debentures are
convertible on 28 February 20X9 at the option of the debenture holders into Klingbros
Limited ordinary shares at a rate of two ordinary shares for every seven debentures. If not
converted into ordinary shares they will be redeemed on 28February 20X9.
6. On 3 1 March 20X7, 50 000 ordinary shares were issued.
I:
7. On 30 September 20X8, Klingbros Limited undertook a share buy-back of 200 000

ordinary shares at a premium of C4 per share.
Required:
Disclose earnings per share in the statement of comprehensive income of Klingbros Limited
for the year ended 3 1 December 20X8 in accordance with International Financial Reporting
Standards.
Question 8.19
Lambson, Golden and Myburg Limited is a listed KSE company.
Details for their current reporting period is as follows
The
correctly calculated profit after tax for the year ended 31 December 20X8 is
C550 000 (20X7: C 400 000)
At 31 December 20X7 the following were in issue:
350 000 ordinary shares of C 3 par value each
300 000 10% redeemable, cumulative preference shares of C3 each. The preference
dividends for 20X8 have not yet been declared. The 20X7 preference dividends were
declared on 30 November 20X7.
Options to acquire 40 000 ordinary shares in Lambson, Golden and Myburg limited
after 30 November 20X9 at a strike price of C 6 per share. The average market price
of the shares during 20X8 was C 10 per share
Chapter 8
106
Earnings per share
The following transactions took place in 20X8:
1 January 20X8 200 000 12% convertible debentures of C 2 each were issued. These
debentures are convertible on 30 September 20X9 at the option of the debenture
holders into Lambson, Golden and Myburg limited ordinary shares at a rate of one
ordinary share for two debentures. If not converted into ordinary shares they will be
redeemed on 30 September 20X9
On 3 1 March 20X8, there was a capitalisation issue of 2 ordinary shares for every 5
shares in issue. The capitalisation issue utilised current share premium as far as is
possible so as to minimise the impact of this issue on retained earnings.
On 30 September 20X8 50 000 ordinary shares were issued at their market value on
that date. Another such issue of 10 000 shares took place on 30 November 20X8 at
their market value on that date.
On 20 October 20X8, 30 000 ordinary shares were offered to existing shareholders.
The offer was fully subscribed for at C 7 per share on 31 October 20X8, when the
market price was C 10 per share.
The following note is available:

5.Profit before tax
Profit before tax is stated after taking the following into account
Provision for
environmental restoration
Plant - impairment
-depreciation
30 000
35 000
20 000
The corporate tax rate is 30%
Required:
Disclose the EPS in the statement of Comprehensive income and the notes to the financial
statements of Lambson, Golden and Myburg limited for the year ending 31 December 20X8
in accordance with IFRS.
Chanter 8
107
Statement of comprehensive income disclosure
[Part 2j
Chapter 9
:
Question
9.1
9.2
9.3
9.4
9.5
Key issues
Basic disclosure, including statement of comprehensive income, statement of
changes in equity, notes, sale of non-depreciable asset above cost
Disclosure of accounting policies, revenue, operating expenses, income from
subsidiaries, taxation
Deferred tax, disclosure of revenue, profit from operations and taxation
Error, change in estimate, EPS.
Error in prior and current year, revenue
Chapter 9
109
Statement of comprehensive income disciosure
Question 9.1
The financial director of St Kitts Limited is in the process of finalizing the financial
statements for the year ended 28 February 20X7. The trial balance at that date is as follows:
ST KITTS LIMITED
Debit

Share premium
Distributable reserves
Borrowings
Accounts payable
Accrued expenses
Accounts receivable
Accrued income
Inventory
Tax Refundable
Cash at bank
Revenue
Cost of sales
Net operating expenses
Interest on borrowings
Credit
3 000 000
1 500 000
1 424 200
2 000 000
400 000
20 000
4 200 000
1 100 000
15 000
1 800 000
200 000
2 059 200
12 000 000
7 100 000
3 480 000
240 000
150000
20 344 200
20 344 200
The authorised share capital comprises 10 000 000 ordinary shares of CO.50 each. During
the year, 1 000 000 shares were issued at a price of C2.00. The issue of the shares has
been correctly recorded in the accounting records. Share issue expenses of C150 000
were paid. The financial director wishes to account for these expenses with the minimum
impact on distributable reserves.
The borrowings relate to a loan taken out by St Kitts Limited on 1 July 20X4 for a three
year period. The company does not have the right to defer settlement of the loan.
The balance on the property, plant and equipment comprises property of C3 150 000 and
plant and equipment of Cl 050 000. Property is measured at valuation and plant and
equipment is measured at cost. At year end, the directors engaged the services of an
independent valuer who has valued the property at C3 950 000.
During the year, an item of plant and equipment was sold for C330 000.
This item of
plant had cost C300 000 and to date of sale accumulated depreciation and tax allowances
amounted to C120 000.
The inventory has a net realisable value of Cl 720 000 and the accounts receivable are
expected to realise C980 000.
Chapter 9
110
Included in the operating expenses are depreciation of property, plant and equipment
amounting to C210 000, salaries of Cl 800 000, advertising of C35 000, repairs to
equipment of C28 000 and auditors remuneration of Cl 10 000.
Dividends of C0.05 per share were declared on 25 March 20X7. The financial statements
were authorised for issue on 30 March 20X7.
The financial director wishes to present the face of the statement of comprehensive
income and statement of financial position in accordance with the minimum requirements
of IAS I.
The current normal income tax rate is 29%.
Required:
a) Prepare the statement of comprehensive income of St Kitts Limited for the year ended

b) Prepare the statement of changes in equity of St Kitts Limited for the year ended
c) Prepare the current liabilities section of the statement of financial position of St Kitts
Limited at 28 February 20X7, in accordance with International Financial Reporting
Standards
d) Prepare the following notes to the financial statements in accordance with International
Financial Reporting Standards
Statement of compliance and accounting policy for basis of preparation

Share capital, profit before tax, taxation expense and dividends
Ignore deferred tax
Question 9.2
The trial balance of World Limited at 30 June 20X2 is shown below. World Limited is an
industrial company and a leader in researching environment friendly production methods.
fhantei* 9
Ill
Statement of comprehensive income disciosure
WORLD LIMITED
TRIAL BALANCE AT 30 JUNE 20X2
Debit
Sales
Dividend income
Interest income
Management fee income
Royalty income
Cost of sales
Administrative and selling expenses
Audit fees
Bad debts expense
Depreciation expense
Donations
Impairment of inventory
Maintenance of industrial plant
Operating lease expenses
Salaries expense
Interest expense
Ordinary dividend
Current tax receivable
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Retained earnings
2
3
4
Credit
84 986 750
I 150 000
430 000
900 000
175 000
24 602 000
1 327 100
185 400
237 500
1 180 000
2 405 000
75 000
1 307 500
2 465 000
1 602 500
34 237 750
367 500
2 750 000
5 093 575
65 200 000
18 455 000
161 490 825
2 300 000
7 500 000
50 000 000
14 049 075
161 490 825

1. The dividend income and management fee income is received from Summit Limited, a
subsidiary of World Limited. (Assume dividend income is exempt from tax)
2. The administrative and selling expenses include an amount of C200 000 relating to
insurance for the period from 1 October 20X1 to 30 September 20X2. The amount has
been paid and is allowed as a deduction for tax purposes.
3. The audit fees comprise the following:
Fee for audit

Tax consulting
Accommodation expenses
Travel expenses
C
212 000
12 500
5 000
8 000
237 500
4. Included in the bad debts of Cl 180 000 is an amount of C975 000 relating to a customer
that went into liquidation in January 20X2. No further amounts are expected to be
received. The amount is considered to be material.
Chapter 9
112
5. The donations comprise amounts paid to the Green Planet Trust, a charitable organisation.
6. The maintenance of industrial plant of C2 465 000 includes an amount of C250 000
relating to installation costs of new plant purchased on 1 November 20X1. The invoice
price of the plant (excluding the installation costs) and the related depreciation has been
correctly recorded in the accounting records. World Limited accounts for depreciation at
15% per annum on the straight line method.
The tax authority has granted a total tax allowance on the industrial plant of C3 382 000
for the year ended 30 June 20X2.
7. The ordinary dividend was declared on 28 June 20X2.

8. The balance on the Current Tax Payable/ Receivable account of C5 093 575 represents
provisional tax payments for the year ended 30 June 20X2. No entry has been made in
respect of an over-provision of tax of C450 000 for the year ended 30 June 20X1.
Required:
Prepare the statement of comprehensive income and accompanying notes of World Limited
for the year ended 30 June 20X2 in accordance with the requirements of International
Include accounting policies for the basis ofpreparation and revenue recognition.
The deferred tax note is not required.

Earnings per share is not required.
Question 9.3
The following is an extract from the trial balance of Electoral Limited at 31 March 20X4:
:
:
ELECTORAL LIMITED
EXTRACT FROM TRIAL BALANCE AT 31 MARCH 20X4
Debit
Gross profit
Other income
Other operating expenses
Interest expense
Royalties received in advance - 1 April 20X3
Rates and taxes paid in advance - 1 April 20X3
Underprovision of tax in prior years
Deferred taxation - 1 April 20X3
Manufacturing plant
Motor vehicles
Computer equipment
Furniture and fittings
Chapter 9
Credit
2 000 000
1 860 000
1 200 000
1 000 000
2 807 000
250 000
30000
25 000
5 000
350 000
2 000 000
1000 000
500 000
500 000
113
Revenue comprises:
C
vSaies of ballot papers to the government
Services rendered with respect to election day
7 500 000
5 000 000
Other income comprises the following items:
Rent received from investment property

Royalties received
(According to the royalty

agreement, royalties of
CIO 000 are due every
month)
(Electoral Limited holds
1000 C100 12%
Interest received on debentures
C
1 500000
100 000
10 000
debentures, which were

purchased in 20X0)
Interest received from money market

investment
Profit on sale of manufacturing plant
140 000
110 000
1 860 000
Dividends received:
Electoral Limited has a 5% share in United Freedom Limited, a company listed on the
stock exchange. United Freedom Limited paid an interim dividend of C100 000 to
shareholders in September 20X3, and declared a final dividend of C200 000 on
20 March 20X4, to shareholders registered on 3 1 March 20X4.
Electoral Limited received a dividend of C20 000 from their investment in an unlisted
company, Democracy for All (Pvt) Ltd.
* Dividend income is exempt from tax
The following items of expenditure are included in the distribution, administration and
other operating expenses:
Audit fees
- Fee for audit
- Expenses
- Fees paid for tax consulting
services
Depreciation charge for the year
Operating iease payments
Rates and taxes paid
250 000
12 000
10 000
(Includes an amount of C40 000

relating to April and May 20X4)
900 000
600 000
145 000
1000 000
Salaries
Chapter 9
114
Wages
Traffic fines
Legal fees
Donations
(C5 000 is not tax deductible

(C20 000 is not tax deductible)
800 000
10 000
75 000
50000
Property, plant and equipment:
* An item of manufacturing plant was sold during the year
selling price of
C360 000. The plant had cost C300 000 on purchase. At the date of sale the carrying
amount of the plant was C250 000 and the tax base was C200 000.
at a
Wear and tear allowances of Cl 165 000 in total were allowed by the tax authorities
for the year. The tax base for the various items of non-current assets at
31 March 20X4 were as follows:
C
1050 000
1 200000
300 000
230 000
Manufacturing plant
Motor vehicles
Computer equipment
Furniture and fittings
An interim dividend of Cl 15 000 was paid in October 20X3. A final dividend of

C130000 was declared on 5 April 20X4, payable to shareholders registered on
14 April 20X4.
The normal tax rate for the year ending March 20X3 was 35% and decreased to 30% for
the year ended March 20X4.
Required:
a) Prepare a deferred taxation computation worksheet showing the carrying amount, tax base
and temporary difference applicable to each relevant statement of financial position item,
indicating the nature of the temporary difference (taxable or deductible) as well as the
total movement in deferred taxation for the period.

b) Prepare the statement of comprehensive income of Electoral Limited for the year ended
31 March 20X4, in accordance with International Financial Reporting Standards.
c) Prepare the notes to revenue, profit before tax and taxation for the year ended
31 March 20X4, in accordance with International Financial Reporting Standards.
Comparatives are not required
Question 9.4
Mango Limited, a listed company in the travel goods industry, was incorporated during 20X1
with an issued share capital of:
* 150 000 12% cumulative, non-redeemable preference shares
200 000 10% non-cumulative, non-redeemable preference shares

*
400 000 ordinary shares of Cl each issued at a premium of 0.50 cents
Chapter 9
115
1
1
?.;0
Statement of comprehensive income disclosun
Since incorporation the oniy changes to the capital structure of Mango Ltd were a fresh issue
of 100 000 ordinary shares at a premium of Cl on 1 July 20X4 and a capitalisation issue of 1
share for every 5 held on 1 April 20X5. It is company policy to utilise the share premium
account to the maximum extent possible.
The following are the draft statement of comprehensive income and draft statement of
changes in equity of Mango Limited for the year ended 31 December 20X5:
MANGO LIMITED
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Profit before tax
Income tax expense
20X5
C
7 200 000
(3 600 000)
3 600 000
550 000
20X4
C
5 400 000
(2 160 000)
3 240 000
300 000
(880 000)
(760 000)
3 270 000
(960 550)
2 780 000
(808 950)
2 309 450
1 971 050
2 309 450
1 971 050
MANGO LIMITED
EXTRACT FROM DRAFT STATEMENT OF CHANGES IN EQUITY
_
Retained earnings
20X5
20X4
C
C
2
132
550
579
082
Balance at 31/12/X4
2 309 450
1 971 050
156 000
Dividends paid
100 000
Ordinary dividends
36 000
12% Preference dividends
20 000
10% Preference dividends
5 015 582
Balance at 31/12/X5
2 550 132
The following information is relevant
Shortly before the end of December 20X5, the company auditors discovered that the sales
manager, Mr Leo, had recorded several fictitious credit sales invoices amounting to
C 150 000 during the 20X3 financial year and C 500 000 during the 20X4 financial year.
Mr Leos motive in doing this was to obtain additional sales commission, earned at 5% of
the total annual sales generated by him. The commission was paid to Mr Leo at the end
of 20X3 and 20X4 respectively. The company will proceed to recover the commission
from the sales manager. The above is considered to be material and no entries have been
processed to correct the fraud.
Chapter 9
116
* On I April 20X2, Mango Ltd bought
the rights to manufacture a range of light weight,

indestructible umbrellas at a cost of C750 000. The cost was correctly recognised as an
intangible asset and is being amortised over its expected useful life of 15 years to a nil
residual value using the straight -line method.
During December 20X5 it was determined, however, that the expected useful life of the
purchased right was only 10 years. The company has decided to use the reallocation
method to adjust for a change in an accounting estimate.
The financial manager had calculated the annual amortisation charge (as per the draft
statement of comprehensive income) using an estimated useful life of 15 years.
The profit before tax in 20X4 includes a loss on disposal of land of C85 000 and the 20X5
profit for the period includes an amount of C40 000 relating to the impairment of an item
of equipment to its recoverable amount.
The tax authorities grant the following applicable wear and tear allowances and
deductions and will re-open the tax assessments for the prior years:
intangible assets: 10% per annum straight line (not apportioned for time)
commission paid is fully deductible
The normal company tax rate is 29%
Required'.
a) Prepare the journal entries to account for the error and the change in estimate in the
accounting records of Mango Ltd for the year ended 31 December 20X5.
b) Prepare the statement of comprehensive income and statement of changes in equity of
Mango Ltd for the year ended 31 December 20X5 in accordance with International
c) Prepare notes to EPS in terms of IAS 33 Earnings per share
Comparatives are required only for (b) and (c).
The statement of financial position and related notes as well as accounting policies are not
required
Question 9.5
Chartwell Limited discovered
31 December 20X6:
two
problems during their financial year ended
a glitch in their computerized accounting programme that arose during 20X6; and
the use of an incorrect discount rate when measuring revenue from an instalment sale.
The computer glitch:
The computer glitch resulted in 10% of all income from services rendered during 20X6
being allocated to the income from sale of widgets account.
Chapter 9
117
vjiijjping ICRS : Graded
Questions
Statement of comprehensive income disciosux
5?>
This error was compounded by the fact that royalties are payable by Chartwell Limited
based on 2% of total annual sale of widgets, as reflected on the trial balance.
The royalty expense is deductible for tax purposes on the accrual basis (i.e. in the year in
which they are incurred).
The incorrect discount rate:
The incorrect discount rate involved an instalment sale transaction that was measured
using a discount rate of 17% instead of 7%.
The instalment sale agreement requires three arrear annual instalments of C300 000 each
to be paid to Chartwell Limited on 30 June of each year. This agreement was signed on
1 July 20X4, on which date all the criteria for recognition as a sale were met.
The income from this sale, using the 17% discount rate, was therefore measured at
C662 876. Had the 7% discount rate been used instead, the sale would have been
measured at C787 295.
The tax authorities tax the income from this sale on the accrual basis (i.e. in the year in
which the income is earned).
The following is the trial balance of Chartwell Limited for the year ended 31 December 20X6,
before making any adjustments that may be necessary as a result of the two errors identified
above:
?
CHARTWELL LIMITED
Debit
Income from instalment sales
Income from sale of widgets
Income from services rendered
Dividend income
Interest income
Cost of sales and services
Interest expense
Operational expenses (20% administration; 30% distribution; 50% other)
Royalty expense (to be classified as other expense)
Tax expense
Share capital
Share premium
Dividends declared: 30 June 20X6
Current tax payable
Deferred tax
Creditors
Debtors
Credit
980 000
200 000
900 000
400 000
260 000
1 500 000
30 000
200 000
4 000
285 000
200 000
78 000
331 800
50 000
864 800
30 000
15 000
182 000
528 000
5 000
Royalty payable
Bank
120 000
3 581 800 3 581 800
Chapter 9
118
The following is extract of the statement of financial position of Chartwell Limited as at

31 December.
CHARTWELL LIMITED
EXTRACT OF THE STATEMENT OF FINANCIAL
POSITION
FOR THE YEARS ENDED 31 DECEMBER 20X5 AND
20X4
20X5
3 200 000
331 800
320 000
52 000
Debtors
Retained income
Deferred tax liability
Current tax payable
20X4
2 400 000
11 800
300000
40 000
The financial year end is 3 1 December.
Normal tax is levied on taxable profits at 30%.
The tax authority will not re-open the tax assessments for 20X5 and/ or any prior years.
Any adjustments necessary will therefore have to be included in the 20X6 tax returns.
The entitys accounting system is unable to re-open the trial balances before 20X5 with
the result that all adjusting or correcting journal entries must be processed in the relevant
years of 20X5 and/ or 20X6.
The profit recognized in 20X5 was C320 000,
There were no dividends declared in 20X5.
* There was no movement in share capital and no transfers to or from the retained earnings
during either 20X5 or 20X6.
All items are considered material.
Required:
a) Process all correcting journal entries related to the computer glitch that would be required
in order to finalise the financial statements for the year ended 31 December 20X6.
b) Produce the effective interest rate table necessary to measure revenue from the sale
transaction using the previously used 17% discount rate.

c) Produce the effective interest rate table necessary to measure revenue from the sale
transaction using the correct 7% discount rate.
d) Process all correcting journal entries related to the use of the incorrect discount rate that
would be required in order to finalise the financial statements for the year ended
31 December 20X6.
Chanter 9
119
gripping IFRS : Graded Questions
I
>
Statement of comprehensive income disclosu:
e) Disclose the correction of error note and revenue note to be included in the notes to the
financial statements for the year ended 31 December 20X6 in accordance with
International Financial Reporting Standards,
f) Prepare the statement of comprehensive income for the year ended 31 December 20X6 in

g) Prepare the statement of changes in equity for the year ended 31 December 20X6 in
h) Prepare the statement of financial position as at 31 December 20X6 in accordance with
Chapter 9
120
Property, plant and equipment and

impairment of assets
jParl 3j
Chapter 10
Question
Key issues
Section A
Recognition, measurement at recognition, measurement after recognition
_(depreciation), derecognition and disclosure _

10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Section B
Basic disclosure, accounting policies and notes

Basic disclosure, notes including capital commitments
Elements of cost, subsequent costs, components, depreciation period: journals
Recognition of separate components, decision to expense or capitalise,
depreciation of separate components: journals and disclosure
Recognition of separate components, decision to expense or capitalise,
depreciation of separate components, change in estimate and journals
Recognition of separate components, inspection costs: journals
Self-constructed asset, construction costs, depreciation: journals and disclosure
Internal manufacture of an asset, exchange of asset, repair of asset: discussion
Understanding: residual value, recognition principle, depreciation period,
depreciation, inspection costs
Measurement after recognition (cost model and revaluation model),
_impairments and disclosure _

10.10
10.11
10.12
10.13
10.14
10.15
10.16
Impairment test, recoverable amount, residual amount and net realisable value
Initial measurement, objective of and test for impairment, re-assessment of
recoverable amount, disclosure, using cost model
Initial measurement, test for impairment, journal entries, using cost model
Journals and disclosure
Part A: Cost model: impairment followed by impairment reversal
Part B: Revaluation model: impairment followed by revaluation increase
Part C: Revaluation model: revaluation decrease followed by revaluation
increase
Cost and revaluation models compared: - journal entries with and without tax
effects
Revaluation model: journals without tax: Revaluation increase, followed by a
revaluation decrease then a revaluation increase
Revaluation model, revaluation increase followed by revaluation decrease below
historic carrying amount
Part A: Journals and disclosure (ignoring tax consequences)
Part B: Journals and disclosure (with tax consequences)
Chapter 10
121
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25

_ impairment of assets
Revaluation model, revaluation increase, followed by a revaluation decrease

above historic carrying amount
Part A: Journals and disclosure (ignoring tax consequences)
Part B: Journals and disclosure (with tax consequences)
historic carrying amount with disclosure in the financial statements
Revaluation model, revaluation increase followed by a revaluation decrease
above historic carrying amount, apportionment of depreciation and tax
allowances, journals and disclosure
Cost model: impairments and reversals of impairments, journal entries and
disclosure
Cost model, impairments and reversals:
Part A: Ignoring tax consequences, journals and disclosure
Part B: With tax consequences, journals and disclosure
Revaluation model, (revaluation increase / decrease): journals and disclosure
Gross replacement method vs. net replacement method
Revaluation model disclosure
Initial costs
Chapter 10
Si

;X;.
Question 10.1
The following is an extract from the trial balance of Kershaw Limited for the year ended
30 June 20X4:
KERSHAW LIMITED
EXTRACT FROM TRIAL BALANCE AT 30 JUNE 20X4
Land acquired 1/1/20X2, at cost

Office buildings erected 30/6/20X4, at cost
Fixtures and fittings, at cost
Accumulated depreciation of fixtures and fittings at 1/7/20X3
Debit
80 000
50 000
Credit
60 000
10 000
Depreciation is calculated at 10% per annum reducing balance on fixtures and fittings. No
depreciation is calculated on land. Buildings are depreciated at 2% per annum on the straight line
basis.
All residual values are assessed to be zero and this has remained unchanged since acquisition.
Required:
Prepare the property, plant and equipment note to the financial statements for the year ended
30 June 20X4.

Question 10.2
Treasure Limited purchased land for C 120 000 during the current year. The following
transactions have taken place regarding the construction of a building on the land:
A contract for the clearing of land amounting to C 20 000 was concluded. A progress
report at 31 March 20X3 was received showing that one quarter of the land had been
cleared, but no payments have yet been made. The clearing was preparatory to the
construction of the building.
An architect has been consulted in relation to plans for the new building.
commence work in April 20X3 at an agreed fee of C 10 000.
The directors have authorised the signing of a contract with AB Builders Limited to the
value of C 120 000 for the construction of the building. Construction has not yet
commenced.
The directors have also approved the issue of 100 000 C 1.15% redeemable, unsecured
debentures at 4% discount in order to finance the above expenditure. These debentures
were issued on 3 1 March 20X3 and will be redeemed at par on 1 April 20X8. The balance
of the funds required to pay for the building will be derived from cash generated by
operations.
1A
He will

I
!
Required:
Show how the above would appear in the financial statements and notes of Treasure Limited for
the year ended 31 March 20X3 in terms of International Financial Reporting Standards.
Question 10.3
Olympic Limited is a diversified industrial company with many different areas of operation.
The following information relates to the companys property, plant and equipment. The
company has a 30th September year end.
All the plant was purchased and brought into use on 1 October 20X1 at a cost of
C 800 000. The cost of testing the plant amounted to C 45 000 and samples manufactured
while in the testing phase were sold for C 5 000. The useful life of the plant is estimated
at five years and the residual value is estimated at C 40 000. At 30 September 20X4,
similar items of plant of five years age are currently realising C 70 000. The production
director, however, expects the entity to obtain C 100 000 on disposal. The entity applies
the re-allocation method.
The motor vehicle consists of a delivery van purchased on 1 October 20X3 at a cost of C
270 000. The useful life is estimated at four years and the residual value is estimated at
CO. At 30 May 20X4, the tyres of the delivery van are replaced with tyres of a better
quality. The new tyres cost C 24 000 and have an estimated useful life of two years. It is
estimated that the original tyres cost C 12 000. Costs of servicing the delivery van during
the year amounted to C 12 500.
A helicopter was purchased on 1 October 20X0 at a cost of C 1 500 000. The following
components were identified:
Airframe
Interior
Engines & rotar blades
Inspection
Cost
C
800 000
100 000
400 000
200 000
Residual value
C
0
0
30 000
0
Useful life
Years
10
10
5
3
In order to maintain the operating license for the helicopter, inspections are required to be
performed every three years on the anniversary of the purchase date. The cost of the
inspection at 1 October 20X3 amounted to C 240,000.
A photocopy machine was purchased for the office at a total cost of C 280 000 and
delivered to the premises of Olympic Limited on 15 January 20X4. The machine needed
to be installed by a technician and this was completed by 31 January 20X4. The machine
was available for use on this date. However, management decided not to use the machine
until 1 March 20X4 as an existing photocopy machine was on lease until that date. Use of
the machine began on 1 March as planned and the machine was used continuously
throughout the financial year except for the month of August 20X4 when a new high tech
machine was given to Olympic Limited on a trial basis. The useful life of the machine is
estimated at 3 years and the residual value is estimated at C 40 000.
The normal tax rate has remained at 30% throughout the periods under review.
Chapter 10
124

Required:
Prepare al! the journal entries relating to the property, plant and equipment of Olympic
Limited for the year ended 30 September 20X4.
Question 10.4
Ancient Waters Limited is a company involved in bottling spring water. The company
purchased a bottling plant on 2 January 20X2. The plant is made up of three significant
components, the cost of which is as follows:
Description of component:
Cost price
C
1 500 000
2 000 000
800 000
Engine
Conveyor belt and fittings
Outer structure
Residual value Expected useful

C
life
500 000
5 years
0
8 years
50 000
3 years
Other costs incurred in relation to the bottling plant are as follows:

Description of cost:
Delivery and installation
Staff training
Testing to ensure plant fully operational before start of
production
Launch party
Initial operating loss
C
750 000
60 000
33 000
Transaction date
5 January 20X2
16 January 20X2
19 January 20X2
210 000
45 000
21 January 20X2
March 20X2
Other information:
The plant was available for use in production on 1 February 20X2, although production
only began on 1 March 20X2.
The plant was temporarily idle during December 20X2 when the factory closed down for
its annual holiday period.
The company uses the straight-line method when depreciating its bottling plant (not
apportioned for part of a month).
All other costs are considered to be incurred evenly between the three significant
components of the bottling plant (i.e. where appropriate, a third of the cost is allocated to
each component).
The only other asset owned by Ancient Waters Ltd is land which was purchased on
5 December 20X0 for C 4,000,000. The land is not depreciated.
Required:
a) Show all related journal entries relating to the bottling plant for the year ended
31 December 20X2 and 20X3. Round to the nearest Cl.
equipment note in the financial statements of

Ancient Waters Limited for the year ended 31 December 20X3.
b) Disclose the property, plant and
Ignore the effects of taxation.
Oianter 10
125

Question 10.5
Unwind Ltd operates in the building industry. It is a vendor for VAT purposes. The
following schedule of property, plant and equipment was relevant as at 31 December 20X3,
the end of the previous financial year:
Date of purchase
Equipment
Light aircraft
- bodywork and interior
- engines and propellers
- inspection
Vehicle
1 January 20X1
1 January 20X1
1 January 20X3
Cost
C
180,000
380,000
80,000
200,000
100,000
100,000
Residual
Value
Useful life
C
0 9 years
80,000
0 8 years
80,000 15 000 miles
0 4 years
10,000 4 years
Subsequent information relating to the property, plant and equipment follows:

Equipment
A fire in the warehouse in late December 20X3 damaged the equipment. The recoverable
amount of the equipment was estimated at 31 December 20X3 to be C 105,000.
The equipment was partially repaired on 5 January 20X4 at a cash cost of C 30,000. This
was paid for on the day of repair and no VAT was charged.
i
The recoverable amount of the equipment was estimated to be C 114,000 immediately

after the repair.
Light aircraft
The aircraft requires a major inspection every 4 years.
It was inspected on 27 December 20X4 at a cost of C 171,000 (including VAT). This was
paid for on the date of inspection.
It has been estimated that the next major inspection will cost C 205,200 (including VAT).
The aircraft flew 3,000 miles in 20X4.
Vehicle
It is expected that this vehicle will sell for C 25,000 (excluding VAT) at the end of its
useful life in two years time. Similar assets that are four years old have realised C
17,500 on sale.
The company uses the re-allocation method to account for changes in accounting
estimates.
Computer
A new computer was purchased and paid for on 24 December 20X3 (cost: C 57,000,
including 14% VAT) but delivered on 15 March 20X4.
The software necessary to run the computer was installed on 1 April 20X4, before which
the computer was not able to be used.
Chapter 10
126
'

The computer was brought into use a month later on 1 May 20X4 and was used
continuously except for the month of August 20X4, during which time technical problems
were experienced, requiring the software to be reinstalled. The reinstallation could only
be done by the same technician who performed the original installation. The computer
was not impaired in any way. The technician carried out the reinstallation on 1 September
20X4 at no cost to Unwind Ltd.
The residual value is nil and the useful life is 5 years.
Required:
Prepare all journal entries relating to the property, plant and equipment of Unwind Ltd for the
year ended 31 December 20X4. Set your answer out as follows:
a) Journal entries relating to the equipment
b) Journal entries relating to the aircraft

c) Journal entries relating to the vehicles
d) Journal entries relating to the computer
Question 10.6
Dolphin Limited owns only two items of property, plant and equipment:
a medical waste disposal plant (carrying amount at 31 December 20X3: C 5,600,000); and
a ship that was purchased on 2 January 20X4 (purchase price: C 20,000,000).
There were no sales and no other purchases of property, plant and equipment during 20X4.
The purchase price paid for the ship has been analysed as follows into the estimated cost per
significant component:
Description of component
Hull
Comments
Cost
C
10 000 000 Estimated useful life of 8 years with a residual
value of C 2 000 000
Engine room
9 000 000 Estimated useful life of 1 000 000 nautical

miles with a nil residual value
Major inspection (which

had been performed on
5 January 20X2)
1 000 000 Major inspections are a pre-requisite to the

continued use of the ship.
The next major inspection was due and
performed on 30 June 20X4 at a cost of
C 6 000 000 - paid in cash.

The following major inspection is due on
31 December 20X6 at an expected cost of
C 7 500 000.
Total price paid

(2/Jan/20X4)
20 000 000
Chapter 10
127
___

Depreciation on the medical waste disposal plant was C 2,800,000 in 20X4 (being the
total depreciation on all of its components). Depreciation is provided on the medical
waste disposal plant using the straight-line method.
Depreciation on the ship is to be provided on the sum of the units method w'here possible.
Where this method is inappropriate, the straight-line method is to be used instead. The
ship travelled 100,000 nautical miles during 20X4.
Required:
Journalise the movement in the carrying amount of property, plant and equipment for the year
Ignore tax effects.
Question 10.7
Roads International Limited constructed its own specially designed tarring vehicle. Details
of related costs incurred are as follows:
Description of cost:
Cost of raw materials purchased
Cost of raw materials used in construction of tarring
C
Transaction date
500 000 1 February 20X2
100 000
vehicle during June 20X2

Tests to ensure vehicle safe before brought into use
Depreciation on machinery to 3 1 December 20X2
Factory labour costs to 31 December 20X2
20 000
200 000
300 000
30 September 20X2
The company-owned machinery was used for a quarter of the year in the construction of
the tarring vehicle.
80% of the total labour costs for the year were incurred on building roads and 20%
thereof were incurred in construction of the tarring vehicle. Of the total labour cost
incurred on the construction of the tarring vehicle, an estimated 5% was as a direct result
of a country-wide labour union strike during which labourers were paid but yet did not
turn up for work.
The vehicle was first brought into use on a contract that started on 1 November 20X2,
although it was available for use from 1 October 20X2.
The company uses the straight-line method to depreciate its vehicles. This vehicle is
expected to be sold for C 50 000 at the end of its expected useful life of 5 years. A similar
vehicle realised C 7 000 when sold at the end of 20X2.
Required:
a) Journalise all related transactions for the year ended 31 December 20X2.
b) Disclose the vehicle in the property, plant and equipment note and the separately
disclosable item: depreciation in the notes to the financial statements of Roads
International Ltd for the year ended 3 1 December 20X2.

Ignore the effects of taxation.
Chapter 10
128

Sv
Question 10.8
You are the auditor of a iarge manufacturing company called Yoyo Limited, which has a
December year-end. With the implementation of International Financial Reporting Standards,
the accountant of Yoyo Ltd feels that he has lost touch with the basic principles governing the
accounting treatment of certain elements. He has approached you regarding three issues that
need clarification before the current financial statements for the year ended
31 December 20X0 may be finalised.
Issue a) Internal manufacture of machine B

Included in non-current assets in Yoyo Limiteds statement of financial position at 31st
December 20X0 is Machine B at a carrying amount of C 400 000. Machine B was
manufactured by Yoyo Limited during April 20X0. The machine was completed and
available for use on 1 May 20X0 and was brought into commercial production on 31 May
20X0. Included in the cost of C 400 000 were the following amounts:
Raw materials of C 150 000 (including C 20,000 materials that were destroyed when a
strike by the workers ended in a warehouse being set alight).
Depreciation of other machinery used in the manufacture of Machine B: C 80 000.
Labour costs of C 100 000.
Administration overheads of C 70 000
Issue b) Acquisition of a crane
Yoyo Limited owns only one crane, which is included in property, plant and equipment at
C 500 000 at 31st December 20X0. This crane was acquired at 31 December 20X0 by
exchanging the previously owned crane (with a carrying amount of C 500 000) stationed at
the Durban harbour mouth for the newly acquired crane situated at the Richards Bay harbour
mouth. The accountant is aware that the fair value of the newly acquired crane is actually
C 400 000 but believes that no adjustment is required since this is considered to be an
exchange of similar assets. He added that although it would appear that the company made
a loss in the exchange of the two cranes, this is offset by the savings in not having to
physically move the Durban crane to the Richards Bay harbour where the crane would need
to be stationed from now on. Relocation costs were expected to be approximately C 100 000.
Issue c) Repainting of administration building
The administration building was repainted during the current year ended 31st December 20X0
at a cost of C 300 000. The cost of painting was capitalised to the building on the grounds
that the cost of painting was unavoidable since the directors believed that the building was
looking shabby and that this was detrimentally affecting business.
Required:
Critically analyse each of the above issues, explaining whether the treatment is correct or
incorrect and justifying your advice with references to International Financial Reporting
Standards.
Your answer must be broken down into three separate discussions under the headings given.
Chapter 10
129

Question 10.9
The managing director and financial director are reviewing schedules supporting the draft
financial statements of Collingwood Limited for the year ended 30 June 20X6.
a) MD: I see that the production engineers estimate that we will be able to sell Plant A for
an amount of C 100 000 at the end of its useful life in two years time. Why have you used
a residual value of C 70 000 in the calculation of depreciation?
FD: Plant A has an estimated useful life of five years and we have used the item for three
years. We recently sold a similar item, Plant B, which we had used for five years, for an
amount of C 70 000.
MD That is irrelevant - our production engineers, who know best, estimate that we will
receive C 100 000 at the end of its useful life
b) MD: We replaced the existing ventilation system in the factory with a new system at a
cost of C 240 000 - why has the cost been included as an asset on the statement of
financial position and not expensed in the statement of comprehensive income?
FD: It meets the requirements of Para 7 of IAS 16

MD: Huh? . . . We have not enhanced the system; all we have done is to maintain the
existing level of ventilation in the factory
c) MD: Do you recall that new computerized component which we purchased at the
beginning of our financial year? We only started using it on 1 September 20X5 but I see
that depreciation has been taken into account from 1 August 20X5.
FD: It was available for use from 1 August

MD: Yes, but we only activated it on 1 September. It was not used during August. How
can you allocate depreciation on an item that has yet to be used?
d) MD: The independent valuer that we hired placed a fair value on our property of C
8,000,000 at the end of the year. The statement of financial position at the end of last year
showed the property at a cost of C 5 000 000 with accumulated depreciation of
C 2 000 000.
FD: And so?
MD: Well, you have depreciated the property by C 50 000 during the current year. How
can you do this when the value has increased?
e) MD: I am very pleased with the new corporate jet that we purchased. I just dont
understand your schedule that shows an inspection cost of C 750 000 as part of the asset
cost. All Iremember seeing is an invoice for the total purchase cost of C 3 500 000 and
the aircraft is only due for its next inspection in three years time
FD: C 750 000 is the current market price of an inspection for a three year old aircraft
MD: What? . .
. We bought an aircraft for C 3 500 000 and that is that.
Chapter 10
130
'
I
I

Required:
Identify the issue in each of the dialogues and explain, with reference to IAS 16, the correct
accounting treatment in each case.
Question 10.10
You are the auditor of a large bathroom supplies company called The Running Tap Ltd,
which has a December year-end. With the extensive changes to IFRS, the accountant of The
Running Tap Ltd feels out of touch with the basic principles to use when accounting for
assets. He has approached you regarding two issues that need clarification before the current
financial statements for the year ended 31 December 20X0 may be finalised.
Issue A: Impairment tests
All of the non-current assets were revalued during the current year. For this reason no
impairment tests were performed on any assets during the year.
Required:
a) Discuss whether you agree or disagree with the decision not to perform impairment tests.
b) Although the accountant does not believe that he has to perform any impairment testing,
he has requested that you explain what this would involve if it was necessary for him to
perform an impairment test.
Issue B: Recoverable amount, Residual amount and Net realisable value

The accountant has asked you to clarify the meaning and use of these three terms.
Required:
Explain the meaning and use of these three terms. Your answer should include an explanation
of how each of these three amounts is used, and how these three amounts would be calculated.
Question 10.11
Wien Limited manufactures coffee machines for the domestic and industrial markets. On
2 January 20X3, Wien Limited purchased new equipment to computerise the molding of the
range of coffee machines that it produces. The equipment was available for use on
2 January 20X3 but was brought into use on 2 February 20X3.
The invoice received from the supplier reflected the following:
C
520,000
72,800
592,800
List price of model 123

VAT at 14%
Wien Limited is a registered vendor for VAT purposes.

In addition, Wien Limited paid C 18 000 delivery costs to a road haulage contractor and
C 12 000 to a professional engineer for advice on installation. While the equipment was being
Chanter 10
131

assembled, one of Wien Limiteds employees damaged the equipment costing the company
an additional C 2 000 for repairs. The repair did not constitute a replacement or renewal of a
major component.
The accounting policy of Wien Limited in relation to machinery is to provide for depreciation
at 10% per annum on the straight line method. The residual value at the date of acquisition
was estimated to be C 50 000. The tax authorities agreed to the same rate for tax purposes.
While preparing the financial statements for the year ended 3 1 December 20X7, management
were of the opinion that the machine might be impaired. There is an active market for this
type of equipment and at 3 1 December 20X7 it could have been disposed of to a
knowledgeable, willing buyer for C 270 000. The costs of dismantling and removing the
machine were estimated at C 15 000. The present value of the expected return from the use of
the machine over the remainder of its useful life amounted to C 249 000 and the present value
of the estimated residual value amounted to C 31 000.
At 31 December 20X9, there is evidence from internal reporting that the economic
performance of the asset has been better than expected and the recoverable amount is reestimated. The fair value less costs to sell is estimated to be C 170 000 and the value in use is
estimated to be C 198 000. The company uses the cost model to measure its property, plant
and equipment.
Required:
a) State the amount to be recorded as the initial cost of the equipment in the accounting
records of Wien Limited. Give reasons for your answer.
b) Briefly discuss the objective of the test for impairment and elaborate on the calculation
required to identify whether an asset is impaired.
c) Calculate, using the criteria in IAS 36 'Impairment of Assets', whether the equipment is
impaired at 31 December 20X7.
d) Provide an extract from the notes to the financial statements of Wien Limited at
31 December 20X7 showing all the disclosure relating to the equipment.
e) Calculate the effect of the re-assessment of the recoverable amount of the equipment at
31 December 20X9 and describe the impact of the reassessment on the financial
statements and notes thereto.
Ignore deferred tax
Question 10.12
Lesutu Fisheries is a company fishing the Katse Dam and selling the fish to the public via a retail
outlet in a nearby village. Lesutu Fisheries has two small fishing boats that were purchased for a
total amount of C 30 000 (C 15 000 per boat) on 1 January 20X0. The cost of transporting the
boats to the dam was C 7 ,000 ( in total), and the cost of varnishing the boats with marine varnish
(to protect against rotting in the water) was C 13 000 (in total). In order to improve the company
image, the board of directors decided to paint the boats in its company colours of yellow and
blue. This was done immediately after applying the protective varnish at a total cost of C 10 000.
The company uses the cost model to measure its assets. The boats are depreciated over their
estimated economic useful life of 3 years on the straight-line basis. The current selling price
Chapter 10
132

of similar boats in the same condition expected of the boats after 3 years is C 5 000 (C 2 500
per boat), before taking into account the estimated cost of delivery of the boats to the
purchaser of C 3 000 (C 1 500 per boat).
At 30 June 20X0. the financial year-end of Lesutu Fisheries, the boats collided with each
other in the dam. The market value per boat dropped to C 7 000 as a result, before taking into
account expected selling costs of C 4 000 per boat. The accountant is reluctant to make any
adjustments since the most recent management approved budgets reflects a relatively
unchanged profit forecast from the use of the two damaged boats - a net present value of
C 30 000 from the use of the two damaged boats (C 15 000 per boat) and an estimated net
present value of the net proceeds from the sale of the two damaged boats at the end of their
useful life of C 2 000 (C 1 000 per boat).
Lesutu Fisheries received an insurance payout on 3 July 20X0 of C 25 000 (C 12 500 per
boat). The two damaged boats were traded in for two new boats valued at C 33 000
(C 16 500 per boat) on 4 July 20X0. The trade-in value received for the two damaged boats
was C 9 000 (C 4 500 per boat) and the balance owing was paid by cheque. The two new
boats are to be depreciated at 20% per annum on the straight line method to a zero residual
value.
Required:
a) Calculate the total amount at which the original boats should initially be measured.
b) Calculate the recoverable amount and the impairment loss, if applicable, at 30 June 20X0.
c) Journalise all transactions affecting the fleet of boats up to the year ended 30 June 20X1.
Ignore deferred tea and VAT.
Question 10.13
Part A
Wanderers Limited is a small listed company producing components for satellites that monitor
pollution levels across the globe. Its financial year end is 30 June.
The accounting policy of Wanderers Limited relating to equipment reads as follows:
Equipment is carried at cost less accumulated depreciation and accumulated impairment

losses. Depreciation is provided at 20% per annum on the straight line basis.
The company purchased an item of specialised equipment at a cost of C 800 000 on
1 July 20X0. Details regarding this equipment follow:
At 30 June 20X1, significant developments in technology by competitors led management

to assess the recoverable amount of the equipment. The fair value less costs to sell was
estimated at C 440 000 and the value in use was determined to be C 380 000.
Towards the end of the 20X3 financial year, it became apparent that the competitors new
technology developed in 20X1 was not commercially viable. The recoverable amount was
assessed again and based on market prices, management estimated the fair value less costs
to sell to be C 500 000 and the value in use to be C 400 000.
Chapter 10
133

The estimated useful life has remained unchanged throughout. The residual value is
estimated to be nil (unchanged).
Profit before tax for the year ended 30 June 20X3 before accounting for any expenses or
income relating to the equipment amounts to C 300 000.
The tax authorities grant a tax allowance of 33.3% per annum on the straight line basis in
relation to this equipment. The normal tax rate is 30%. There are no other permanent or
temporary differences other than those evident from the information provided.
Required:
a) To the extent of the information available, prepare extracts from the statement of
comprehensive income, statement of financial position and notes to the financial statements
of Wanderers Limited for the June 20X3 financial year in accordance with International

Accounting policies and comparatives are not required.
b) To prepare the journal entry to account for the change in the recoverable amount of the
equipment at 30 June 20X3.
Part B
The same situation applies as in Part A above, except that management of Wanderers Limited
decide to adopt the following accounting policy relating to equipment:
Equipment is carried at its fair value at the date
of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment losses. Depreciation is

provided at 20% per annum on the straight line basis.
Details regarding this equipment follow:
At 30 June 20X1, significant changes in technology by competitors led management to
assess the recoverable amount of the equipment. The fair value less costs to sell was
estimated at C 440 000 and the value in use was determined to be C 380 000.
Towards the end of the 20X3 financial year, it became apparent that the competitors new
technology developed in 20X1 was not commercially viable. The fair value, as determined
by an independent valuator amounted to C 500 000. The recoverable amount is C 520 000.
Required:
Prepare the journal entries to account for the equipment for the years ending 30 June 20X1 and
30 June 20X3 assuming that the net replacement value method is used.
Part C
The same situation applies as in Part A above, except that management of Wanderers Limited
decide tr sdopt the following accounting policy relating to equipment:
Equipment is carried at its fair value i the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment losses. Depreciation is
provided at 20% per annum on the straight line basis.
Chapter 10
134

Details regarding this equipment follow:
At 30 June 20X1, the fair value of the equipment as determined by an independent valuator
amounted to C 440 000
Towards the end of the 20X3 financial year the fair value of the equipment as determined
by an independent valuator amounted to C 500 000.
Required:
Prepare the journal entries to account for the equipment for the years ending 30 June 20X1 and
30 June 20X3 assuming that the net replacement value method is used.
Question 10.14
Curious Limited has a year end of 31 December. The accountant would like you to explain
and / or calculate the following:
a) IAS 16: terms
Explain the difference between the cost model and the revaluation model, and what the
terms actually refer to.
b) IAS 16: revaluation model increase in value; ignoring tax

Plant cost C 100 000 on 1/1/20X1. Depreciation is provided at 20% per annum on the
straight-line basis. The fair value is C 90 000 at 1/1/20X2. The residual value is assessed
to be zero and this has remained unchanged since acquisition. The company wishes to
transfer the realised portion of the revaluation surplus to retained earnings annually.
i. Calculate and journalise the change in value of the plant.
ii. Calculate and journalise the depreciation of the plant for 20X2.
iii. Calculate and journalise the amount of the transfer from the revaluation surplus to
retained earnings and explain why the company makes this transfer.
c) IAS 16: revaluation model - increase in value; with tax
Same information as in (b) above, except that there is a tax allowance of 20% per annum
on the straight-line method and that the applicable tax rate is 30%.
d) IAS 16: revaluation model decrease in value; ignoring tax

straight-line basis. The fair value is C 70 000 at 1/1/20X2. The residual value is assessed
be zero and this has remained unchanged since acquisition. The company wishes to
transfer the realised portion of the revaluation surplus to retained earnings annually.
to
iii. Calculate and journalise the amount of the transfer from the revaluation surplus
Chapter 10
to
135

e) IAS 16: revaluation model decrease in value; with tax

Same information as in (d) above, except that there is a tax allowance of 20% per annum
on the straight-line method and that the applicable tax rate is 30%. Show all journals.
f) IAS 16: revaluation model - impairment; ignoring tax
straight-line basis. The recoverable amount is C 70 000 at 1/1/20X2. The residual value
is assessed to be zero and this has remained unchanged since acquisition. The company
transfers the realised portion of the revaluation surplus to retained earnings annually.
iii. Calculate and journalise the amount of the transfer from the revaluation surplus to
g) IAS 16: cost model - increase in value; ignoring tax
Same information as in (b) above, except that the company uses the cost model and the
C 90 000 is the recoverable amount at 31 December 20X1.
h) IAS 16: cost model decrease in value; ignoring tax

Same information as in (f) above, except that the company uses the cost model and the
C 70 000 is the recoverable amount at 31 December 20X1.
i. Calculate and journalise the change in value.

The revaluation model is applied using the net replacement value method.
Question 10.15
Maroon Limited has plant that cost C 100 000 on 1/1/20X1. Depreciation is provided over
the useful life of 5 years on a straight line basis to a nil residual value. The company uses the
revaluation model for subsequent measurement of its property, plant and equipment and
accounts for revaluations on the net replacement value method.
The fair value, as assessed by an independent valuator at 1/1/20X2 amounts to C 120 000
The fair value, as assessed by an independent valuator at 1/1/20X3: amounts to C 50 000

The fair value, as assessed by an independent valuator at 1/1/20X4: amounts to C 50 000
The company transfers the maximum amount possible from the revaluation surplus to retained
earnings on an annual basis.
Impairment testing
at the
than carrying amounts.
end of each year found that the recoverable amounts were higher
Required:
Calculate and journalise the transactions for the years ended 3 1 December 20X2, 20X3 and
20X4.
Ignore tax.
Chapter 10
136

Question 10.16
Carryon Limited produces widgets. The following information relates to its plant:
The plant originally cost C 1 000 000 when purchased on 1 January 20X8.
depreciated on the straight-line basis over 5 years to a nil residual value.
Plant is
Plant was revalued to fair value (determined with reference to an active market), by
Mr. Pemickity, an independent appraiser and member of the Institute of Valuers:
On 1/1/20X9 to net replacement value of C 900 000

On 1/1/20Y0 to net replacement value of C 500 000
The company adopted the revaluation model and accounts for the revaluation on the net
replacement value basis.
The company transfers the maximum from the revaluation surplus to retained earnings on
an annual basis. The company intends to keep the asset.
The residual value of plant has remained unchanged since acquisition.
Impairment testing at the end of each year found that the recoverable amounts were
higher than carrying amounts.
Required:
Part A: Ignoring tax:
i)
Journalise all related transactions for the years ending 31 December 20X8, 20X9 and
20Y0.
ii) Prepare the statement of changes in equity for the year ended 31 December 20Y0 in

iii) Prepare the Property, Plant and Equipment note for the year ended 31 December 20Y0 in
accordance with International Financial Reporting Standards:

Part B: Assuming the following information regarding tax:
The tax authorities grant an allowance on plant at 20% on cost;

The normal corporate tax rate is 30% throughout; and
i)
There are no permanent or temporary differences other than those evident from the
information presented above.
Journalise all related transactions for the years ending 31 December 20X8, 20X9 and
20Y0.
ii) Prepare the statement of changes in equity for the year ended 31 December 20Y0 in
Chapter 10
137

iii) Prepare the following notes for the year ended 31 December 20Y0 in accordance with
International Financial Reporting Standards:

Taxation
Deferred taxation

iv) Disclose the closing balance of plant in the Property, plant and equipment note for the
year ended 31 December 20Y0 assuming that the gross replacement value method had
been adopted. The comparative year's closing balance need not be disclosed.
Question 10.17
Midway Limited has always revalued their assets to fair values (based on future income) on a
two-yearly cycle using the net replacement value method. The following information relates
to their specialised vehicles:
C
500 000
420 000
165 000
Original cost (1/7/20X5)

Net replacement value (1/1/20X7)
Net replacement value (1/1/20X9)
Depreciation is provided on the straight-line method to a nil residual value, over an estimated
useful life of five years.
Neither the estimated useful life nor the residual value was changed at any stage. The realised
portion of the revaluation surplus is transferred annually to retained earnings.
There were no indicators of impairment at any stage of the year.
Required:
Part A Ignoring tax:
i)
Journalise the above transactions from date of original purchase to 31 December 20X9.
ii) Prepare, for the year ended 31 December 20X9, in accordance with International
Financial Reporting Standards:

The statement of changes in equity
The profit before taxation note
The property, plant and equipment note
Part B Assume the following additional information relating to tax:
The tax authorities grant an allowance on vehicles at 20% on cost (apportioned for
part of a year where appropriate);
There are no other temporary or permanent differences other than those apparent from
the information given; and
The normal corporate tax rate remained 30% throughout.
Chapter 10
138

i)
Journalize the above transactions from date of original purchase to 3 1 December 20X9.
ii) Prepare, for the year ended 31 December 20X9, in accordance with International
Financial Reporting Standards:

The statement of changes in equity
The profit before taxation note
The property, plant and equipment note
The taxation note
The deferred taxation note
Question 10.18
Greenhouse Limited is a small company listed on the Alt X Exchange. It manufactures
specialist components for satellite navigation to monitor carbon emissions in the atmosphere.
The year-end of the company is 30 June.
The company purchased an item of plant on 1 July 20X5. It was installed and available for
use in the manner intended by management on the same day. The cost of the plant was
C 900 000. It has an estimated useful life of four years and no residual value. The tax
authorities allow a tax allowance of 25% per annum.
Greenhouse Limited uses the revaluation model for the measurement of its property, plant and
equipment and due to the nature of its operations; the company has a policy of revaluing its
property, plant and equipment on an annual basis. The net replacement value method is used.
The company transfers the revaluation surplus to retained earnings as the asset is used.
The fair value of the plant was estimated using discounted cash flows by an independent
valuer at 30 June 20X6 and 30 June 20X7 as shown in the following table. The useful life
and residual value remained unchanged.
Fair value
Date
30 June 20X6 C 825 000
30 June 20X7 C 400 000
The profit before tax has been correctly calculated at C 300 000 for the year ended
30 June 20X7.
There were no indicators of impairment at any stage during the year.
The corporate tax rate is 29% and has not changed since the plant was purchased. There are
no permanent or temporary differences other than those apparent from the information given.
Required:
a) Prepare all the journal entries relating to the plant for the year ended 30 June 20X6
b) Prepare relevant extracts from the statement of comprehensive income and statement of
changes of equity of Greenhouse Limited for the year ended 30 June 20X7 and relevant
extracts from the statement of financial position at 30 June 20X7.
Chanter 10
139
c)

Prepare relevant extracts from the notes to the financial statements of Greenhouse Limited
at 30 June 20X7.
The accounting policy for property, plant & equipment is required.
Accounting policies for statement
taxation are not required.
of compliance, basis of preparation and deferred
Question 10.19
Wimbles Limited is a company producing garden implements. The following information
relates to the companys plant:
The plant originally cost C 600 000 when purchased on 1 January 20X8.
Plant is depreciated on the straight-line basis over 5 years to a nil residual value. This has
remained unchanged since acquisition.
The plant was revalued by Mr. Wimble, an independent sworn appraiser and a member of
the Institute of Valuers, as follows:
On 1/3/20X8 to a fair value of C 725 000

On 1/3/20X9 to a fair value of C 506 000
The company adopts the revaluation model and accounts for the revaluation on the net
replacement value basis. The maximum amount is transferred from the revaluation
surplus to retained earnings on an annual basis. The company intends to keep the asset.
A tax allowance on the plant is granted at 20% per annum on the straight-line basis,
apportioned for time.
There were no indicators of impairment at any stage during the year.

The applicable tax rate is 30% throughout. There are no permanent or temporary
differences other than those evident from the information presented above.
Required:
<
a) Journalise all related transactions for the years ending 28 February 20X8, 20X9 and
20Y0.
b) Prepare the statement of changes in equity for the year ended 28 February 20Y0.
c) Prepare the following notes for the year ended 28 February 20Y0 in accordance with
Profit before tax

Taxation
Deferred taxation
Chapter 10
140

Question 10.20
Machines Limited applies the cost model for measurement of its assets. The following
information applies to its machinery.
C 500 000
1/1/20X1
5 years
Cost
Purchase date:
Useful life
Details of the machinerys estimated recoverable amount over the years is as follows:
C
420 000
280 000
250 000
85 000
0
31/12/20X1
31/12/20X2
31/12/20X3
31/12/20X4
31/12/20X5
The tax authorities allow tax depreciation at 20% per annum on the straight-line method. The
tax rate remained 30% throughout. There are no other temporary or permanent differences other
than those mentioned above.
Residual values over the years were all assessed to be zero and depreciation is provided using
the straight-line method over its useful life. This has remained unchanged since acquisition.
Required:
a) Show the journal entries for each of the years ended 31 December.
b) Prepare extracts from the statement of financial position and notes to the financial
statements in accordance with International Financial Reporting Standards.
Question 10.21
Raingo Limited applies the cost model to its plant, details of which follow:
C 100 000
1/1/20X1
5 years
Cost
Purchase date:
Useful life
Details of the machinerys estimated recoverable amount over the years is as follows:
C
70 000
65 000
30 000
31/12/20X1
31/12/20X2
31/12/20X3
All residual values are assessed to be zero and this has remained unchanged since
acquisition.
Chapter 10
141
I
:

Depreciation is provided using the straight-line method over its useful life.
The drop in the plants value at the end of 20X3 was due to damage caused during a riot
on the factory premises in 20X3. Similar damage was caused during a similar riot in
20X1. The damage incurred during the 20X1 riots was repaired in 20X2.
The company has pledged the plant as security for a loan. Details of the loan will be
provided in note 6 of the notes to the financial statements for the year ended
31 December 20X3.
The company directors signed a contract involving the construction of a plant to be

completed by April 20X4 at an expected cost to the company of C 500 000. Since
construction had not yet begun at year-end, a liability for this amount has not yet been
recognised.
Part A:
Required:
a) Show the journal entries for each of the three years ended 31 December 20X3.
b) Disclose the above in the notes to the financial statements for the year ended
3 1 December 20X3 in accordance with International Financial Reporting Standards.
Ignore tax.
PartB:
allow a deduction for tax purposes of 20% of the cost of the asset per annum;
levy normal corporate income tax at 30%.
There are no temporary or permanent differences other than those mentioned above.
/
Required:
a) Show the journal entries for each of the three years ended 31 December 20X3.
b) Disclose the above in the notes to the financial statements for the year ended
31 December 20X3 in accordance with International Financial Reporting Standards.
Question 10.22
Values Limited uses the revaluation model and has a policy of revaluing their assets to fair
values on a two-yearly cycle using the net replacement value method. The company has a
31 December year end.
Plant was purchased on 1 May 20X5 at a cost of C 450 000. It has a useful life of five years
with no residual value.
At 31 December 20X6, an impairment test found the plants recoverable amount to be
C 220 000. There is no change to the expected useful life or residual value of the asset.
Chapter 10
142
S:?:

At 31 December 20X8, the plant was re-valued by an independent valuer to a fair value of
C 190 000. The recoverable amount on this date is C 205 000. There is no change in the
expected useful life or residual value of the asset. The revaluation surplus is transferred to
retained earnings over the remaining estimated useful life of the asset.
Depreciation is provided on the straight-line method over the plants estimated useful life.
Profit before tax has been correctly calculated at C 800 000 in 20X9 and C 600 000 in 20X8.
The tax authorities allow tax depreciation at 20% on the straight-line basis apportioned for
time. There are no other temporary or permanent differences other than those apparent from
the information given. The tax rate remained 30% throughout.
Required:
a) Journalise the above transactions from date of original purchase.
b) Prepare the statement of comprehensive income for the year ended 31 December 20X9.
c) Prepare the statement of changes in equity for the year ended 31 December 20X9.
d) Prepare the following notes for the year ended 31 December 20X9 in accordance with

Taxation
Deferred taxation
Question 10.23
Able Limited purchased all its plant on 1 January 20X1 and re-values it every four years.
Revaluations have been performed by Trust Valuers, an independent firm of valuers, as
follows:
1 January 20X5: C 8 000 000

1 January 20X9: C 9 000 000.
The plant is depreciated over an expected useful life of 20 years to a nil residual value.
Required:
Prepare the property, plant and equipment note for 20X9 in accordance with International
Financial Reporting Standards using:
a) the gross replacement value method
b) the net replacement value method.
Chapter 10
143

Question 10.24
Cost of plant at 1/1/20X1:
C 200 000
20% straight-line per annum to a nil residua!
value
Depreciation:
The company re-values its plant on an annual basis and records the fair value adjustments
using the net replacement value basis. The following revaluations were performed:
Fair value at 1/ 1/20X2 is C 180 000

Fair value at 1/1/20X3 is C 108 000
Fair value at 1/ 1/20X4 is C 88 000
The company intends to keep the plant. There has never been any evidence of an impairment.
There are no other items of property, plant or equipment.
The tax authorities allow tax depreciation at 20% per annum straight-line. The normal
income tax rate is 30%.
There are no temporary differences other than those evident from the information provided.
There are no components of other comprehensive income other than that which is evident
from the information provided. The company shows components of other comprehensive
income net of tax.
Profit for each year is C 200 000 (after tax).
Required:
Disclose the plant and all related information in the financial statements for the years ended
31 December 20X1, 20X2, 20X3 and 20X4 in accordance with the International Financial
Question 10.25
The following costs were incurred by Travelling 111 Berry Limited during the construction of a
new factory plant in 20X1:
Raw materials: C 400 000 was purchased from external suppliers and C 200 000 was
purchased from an internal division at a 25% mark-up on cost
Labour costs: C 500 000 payments were made to the labourers (i.e. after deductions of
C 300 000 in respect of employee contributions to provident funds and medical aids and after
deduction of employees tax of C 200 000; TIB Limited contributes an equivalent amount to
the funds as do the employees).
Specialised platform: a specialised platform had to be created for the factory plant. This
platform was constructed by subcontractors at a cost of C 750 000. It has a useful life of 10
years and a residual value of C 50 000.
Safety inspection: a safety inspection is required by law before production could begin. The
first inspection was performed on 1 June 20X1 at a cost of C 600 000. Inspections will be
necessary for the continued operation of the plant every 3 years.
Chapter 10
144

A launch party: a party to celebrate the opening of the factory was held on 5 June 20X 1 at a
cost of C 100 000.
Damages: an engine failed on 29 December 20X1 and had to be replaced. The cost of the
original engine was estimated at C 100 000 (considered to be material). The original engine
was scrapped. A replacement engine was purchased and fitted on 30 December 20X1 at a
cost of C 110 000. Due to the unexpected failure, the new engine is now depreciated over a
useful life of 2 years (residual value: nil).
The factory plant is expected to have a useful life of 20 years (the specialised platform will
need to be replaced during this period) and is expected to have a nil residual value. The
straight-line method is considered to be the most appropriate for the plant.
The plant was available for use on 2 June 20X1 and was brought into use on 1 July 20X1.
The plant will need to be dismantled after 20 years at an expected future cost of C 3 000 000.
An appropriate discount rate is 10%.
Day to day maintenance costs: C 20 000 per month was incurred on a subcontracting
company that provided full maintenance of the plant.
Required:
Calculate the carrying amount of the plant in Travelling 111 Berry Limiteds Statement of
Financial Position as at 31 December 20X1 in accordance with International Financial Reporting
Standards.
Chanter 10
145
Intangible assets

04
Part 3|
Chapter 11
Intangible assets
Question
11.1
11.2
11.3
11.4
!
11.5
11.6
11.7
11.8
11.9
11.10
11.11
Key issues
Short questions relating to: identity, control and measurement

Treatment of license
Treatment of research and development costs
Trademark - definition and recognition criteria, initial recognition, subsequent
measurement and subsequent valuation
Research costs compared to development costs
Brand name
Measurement of purchased brand name, limited legal life renewable at
insignificant cost
Measurement of purchased brand name, limited legal life renewable at
significant cost
Journal entries
Purchased compared to internally generated brand, research and development
costs, useful life of patent
Recognition and measurement of catalogues
Chapter 11
147
Intangible assets
Question 11.1
The following scenarios are all unrelated.
Part A
Apple Limited is a successful engineering business. Over the past number of years, the
company has achieved a market share for its products of 30%. At a recent board meeting, the
directors suggested recognising an intangible asset for this market share.
Required:
To briefly discuss whether the market share can be recognized as an intangible asset in terms
of IAS 38, Intangible Assets.
A discussion of the recognition criteria is not required.
Part B
Banana Limited is a company in the IT industry. The success of the company is built around
software which it has developed internally and for which a patent is registered as well as the
skills of the staff that operate the software. Staff is required to give one months notice of
their resignation.
Required:
To briefly discuss whether the patent and the staff skills can be recognized as an intangible
asset in terms of IAS 38, Intangible Assets.
A discussion of the identifiability criteria is not required.
Part C
Carrot Limited manages and operates toll roads on major national routes throughout the
country. The company purchased a license to operate a toll road in the Eastern Cape
seventeen years ago for an amount of C 10,000,000. It was expected that the toll road would
be in use for twenty years and the economic benefits will flow to the entity evenly over the
twenty year period. The estimated toll road usage is 1,000,000 cars per year. At the time,
there were no plans to construct alternative routes in the area. There is no active market for
toll road licenses.
During the current year, the government announced plans, and construction began on a bridge
in the area that would significantly reduce usage of the toll road. The directors estimated that
the economic benefits flowing to the entity would decrease each year over the remaining
three years. The estimated toll road usage is expected to drop to 800 000 cars, 600 000 cars
and 400 000 cars, respectively, over the remaining three years of the license.
The right to operate the toll road was correctly recognized as an intangible asset upon
purchase seventeen years ago.
:
Required:
To discuss the accounting issues relating to the measurement of the license for the toll road
over its economic life.
Chapter 11
148
Intangible assets
Question 11.2
Hurtigruten Limited is a small company involved in the fishing industry. It operates a number
of fishing boats and fishes mainly for tuna. The fish is processed and canned in its factory
and the canned tuna is supplied to supermarkets around the country.
On 2 January 20X6 the company acquired a fishing licence at a cost of C600 000. The license
has a legal life of four years with no residual value. The licence grants Hurtigruten Limited
the right to fish for tuna in a demarcated area off the Western Cape coast. No other fishing
company may fish for tuna in this area during the term of the licence.
The financial director, a retired accountant, expensed the cost of the fishing licence on
acquisition. The managing director (who has taken a keen interest in IFRS developments) has
queried the expensing of the fishing licence:
No entries have been made in the accounting records relating to the fishing license during the
current year.
Required:
Discuss the recognition, measurement and disclosure of the fishing license in the financial
statements of Hurtigren Limited at 31 December 20X6, in terms of International Financial
Question 11.3
Quencher Limiteds business involves the bottling and distribution of a wide- variety of
carbonated soft drinks. Some drinks are developed internally, whilst other brands are
purchased. The following information is relevant to the business for the year ended
30 May 20X5.
N-Gee:
On 1 April 20X5, Quencher acquired the well known brand, N-Gee for an amount of
C2 500 000, which was paid in full at that date.
In addition to this, an amount of C175 000 was spent on legal fees to secure the right to
use this brand. The legal fees were paid on 31 April 20X5.
Due to the fact that Quenchers staff had never previously been exposed to N-Gee,
extensive training (by the staff at the company from whom the N-Gee brand had been
purchased) took place during the month of April 20X5. The total cost of this training
amounted to C200 000.
Sales of N-Gee drinks commenced on 15 May 20X5.
The N-Gee brand has an estimated useful life of fifteen years.

Fliptop:
Fiiptop is a revolutionary type of can which has been developed internally by Quencher over
the past two years. The can has a re-sealable top which allows the can to be sealed after
opening to prevent the gas escaping. In January 20X4 the idea for this new product was
launched, and a loan of C5million was obtained from Borrow Bank in order to finance this
project.
Chanter 11
140
Intangible assets
Question 11.4
You are the auditor of a number of small companies and have been asked to advise
Food Limited on how to deal with the following transaction.
Food Limited is a fast-food company. In order to facilitate expansion, Food Limited
purchased 100% of another successful food company. The purchase negotiations were settled
during the year as follows:
The total purchase price for the business amounted to C40 000.
The net tangible assets acquired were stipulated in the purchase agreement at their fair
value of C19 500.
Although the purchase agreement stipulated that Food Limited also acquired the legal rights
to a trademark for a period of 22 years, no value was attached thereto. The reason is that the
trademark was internally generated by the seller and was thus not recognised in the seller's
financial statements, despite it having been a most profitable trademark for many years.
Initial Recognition: Food Limited intends to record the purchased trademark in its
financial statements at C20 500, calculated as follows:
Purchase price
Less net tangible assets
Trademark
C
40 000
19 500
20 500
Amortisation: Food Limited is unsure whether or not to amortise the trademark since it
believes that the trademark is so profitable that it has an indefinite useful life.
Impairment testing and revaluing to fair values: Food Limited intends to revalue the
trademark annually using the revaluation model.
Required:
Discuss the proposed accounting treatment of the trademark in the financial statements of
Foods Limited. Your discussion should be set out under the following sub-headings:
a) Definitions and recognition criteria relevant to the acquisition of the trademark
b) Initial recognition
c) Amortisation
d) Impairment testing and revaluing to fair values
Intangible assets
Question 11.5
The accounting treatment of research costs differs from that of development costs.
Required
Discuss, with reference to both the Framework and IAS 38, Intangible Assets how and why
the accounting treatment of research costs differs from that of development costs
A discussion of the circumstances under which research and development may be capitalised,
should be included in your discussion.
Question 11.6
Yoyo has, for many years, manufactured a yoghurt drink called Yog-Nog. This brand name
was originally acquired 10 years ago from a competitor company. The cost of this acquisition
came to C800 000, which was duly capitalised. No amortisation had been processed against
this brand name since the brand was already 80 years old at the time of acquisition and, at that
time, there was no indication that demand for this drink was diminishing.
Sales of Yog-Nog have, in recent times, been falling. The marketing department, after much
research into the related consumer behaviour, suggested that the fall in sales was related to the
outdated brand name of the drink. The suggestion was accepted and the drink was re-launched
as Yogi-Yippi during late December 20X10. The cost of re-launching the drink came to
C450 000 and was capitalised as a Yogi-Yippi Brand name since it was expected that sales
would now improve.
The previous brand name, Yog-Nog, with a carrying amount of C800 000, was expensed in
full in the current year ended 3 1st December 20X10.
Required:
Critically analyse the above issue, explaining whether the treatment is correct or incorrect and
justifying your advice with reference to International Financial Reporting Standards.
Question 11.7
Mince Limited is a company manufacturing and retailing food products. The current financial
year ends on 31 December 20X3. The company owns one brand name, pie, shown in the
balance sheet at its carrying amount of C300 000. The right to manufacture under this brand
name for a period of 30 years was purchased on 1 January 20X0 for C300 000. These rights
may be renewed at a cost of CIO 000 (an immaterial cost to the company). The brand name is
considered to have an indefinite useful life. Mince Limited intends not to calculate the
recoverable amount of this brand at 31 December 20X3 since a detailed calculation of the
recoverable amount was done at the end of 20X2 on which date there was an immaterial
difference between the recoverable amount and carrying amount and there appears to be no
indication of an impairment after having performed the indicator review.
Required:
Critically analyse the measurement of Pie in the financial statements of Mince Limited.
11
152
Intangible assets
Question 11.8
Goo Limited owns a brand gobblers, to which legal rights for a 25-year period were
purchased on 1 January 20X1 for C500 000, renewable at a further cost of Cl 000 000. The
gobblers brand is reflected in the balance sheet at its carrying amount of C500 000.
A review of past figures makes it clear that the profits from the brand gobblers are
diminishing dramatically. At the time of the purchase, it was estimated that this brand would
render annual profits of C80 000 and at that time, it appeared so successful that its useful life
appeared to be indefinite. The budgeted profit figures presented at the end of the 20X2
financial period indicated a slight (immaterial) dip in future expected profits, but taken
together with the latest budgeted profits presented at a directors meeting on
29 December 20X3, makes it clear that these annual profits of C80 000 are on a downward
spiral.
These latest budgeted figures show a total estimated net cash inflow of C70 000 over the
remaining legal life. Goo Limited has the option to dispose of this brand to a local
businessman who has recently (December 20X3) offered to purchase it for C220 000. The
only selling costs that are expected will be C2 000 in legal fees. The current financial year
ends on 31 December 20X3.
Required:
Critically analyse the measurement of the gobblers brand in the financial statements of
Goo Limited.
Question 11.9
Ozone Limited has been working on a project to develop a chemical that can be released into
the atmosphere to break the greenhouse gases into gases that are less damaging to the
environment.
The accountant is aware that Cl 500 000 has been incurred, and paid for, between 20X1 and
20X4 but he has been told by the auditors that the manner in which he has accounted for these
costs is incorrect and that given the significant amounts involved, that they would have to
qualify the report if it was not corrected. The auditors had already indicated he should correct
this a month ago but he had not done so, since he had lost the original detail provided to him
by the chief scientist.
Chapter 11
153
:
i
!'
gg
Intangible assets
Question 11.10
Beehive Limited is a company that owns a number of intangible assets. A list of the
intangible assets owned by Beehive Limited together with some detail is provided below:
A brand called Orange blossom. This brand was acquired on 1 April 20X6 for
C2 000 000. The life of the Orange blossom brand is expected to be ten years. There is
no active market for this brand.
brand called Infused ginger. This brand has been developed by Beehive Limited
during 20X6 at a cost of C300 000 (incurred in May 20X6). The life of the Infused
ginger brand is expected to be ten years. There is no active market for this brand.
* A
A lollipop that can be used as a flashlight in the dark is currently being developed. The
initial research into the technical feasibility of this product and its potential market cost
C800 000 during 20X4. Development began on 1 March 20X4 and has cost Beehive
Limited a total of C34 000 000 to 31 December 20X6. All criteria were met for
capitalization of development costs in 20X4. Throughout 20X5, cash flow problems
resulted in Beehive Limited being unsure of their ability to continue the development of
this prototype. The cash flow problems were resolved in early January 20X6 with the
securing of a loan liability from Dodge Bank. Development costs were incurred evenly
over the three years.
The right to manufacture under a patent
for a period of five years was purchased on

1 September 20X6 for C5 000 000. The patent has an expected life of twenty years. This
patent may be renewed for a further period of three years for a sum of C30 000.
Required:
a) Briefly compare aspects of the recognition and measurement of each of the two brands,
Orange blossom and Infused ginger. Your answer should consider:
i) Recognition: Infused ginger Brand versus Orange blossom Brand

ii) Measurement: residual value for purposes of amortising the Infused ginger Brand and
Orange blossom Brand

iii) Measurement models: Infused ginger Brand versus Orange blossom Brand
iv) Journal entries: show the journal entries (relating to both brands) that would have
been processed during 20X6
b) Briefly discuss aspects of the recognition and measurement of the research and
development of the lollipop flashlight in the financial statements of Beehive Limited.

Your discussion should consider:
i) Recognition: research versus development of the flashlight lollipop in each of its years
ended 31 December 20X4, 20X5 and 20X6
ii) Measurement: amortization and impairment testing of research versus development of
the flashlight lollipop
c) Discuss the determination of useful life for the purpose of amortising the patent in the
financial statements of Beehive Limited for the year ended 31 December 20X6.
Chapter 11
155
1
1
Intangible assets
Question 11.11
Part A
Alastairs Natural Remedies Limited is a retailer of health products, including vitamins and
supplements. The company orders 12 000 catalogues to advertise its products. These
catalogues are receive from the printers on 15 September 20X8 and are to be distributed to
customers evenly from 1 September 20X8 to 15 December 20X8, as a promotional activity
for the holiday season.
The catalogues have a cost of C2 each. The amount owing to the printer will be settled in 30
days from delivery of the catalogues.
Alastairs Natural Remedies Limited has a financial year end of 30 September.

Required:
Discuss the recognition and measurement of the cost of the catalogues in the financial
statements of Alastairs Natural Remedies for the year ended 30 September 20X8.
Part B
Same information as in Part A, except:
the amount owing to the printer has been paid in advance on 15 August 20X8, when the
order was placed.
Alastairs Natural Remedies Limited has a financial year end of 30 August.
Required:
Discuss the recognition and measurement of the cost of the catalogues in the financial
statements of Alastairs Natural Remedies for the year ended 31 August 20X8, in terms of
IAS 38, Intangible Assets.
.
Chapter 11
156
Gripping IFRS: Graded Questions
Investment properties
Part 3|
Chapter 12
Question
12.1
12.2
12.3
12.4
12.5
12.6
12.7
12.8
12.9
12.10
Key issues
Short questions - big picture on investment properties
Discussion: property held for more than one use
Change in use: journals and basic theory
Change in use: journals and basic theory
Change in use: disclosure
Cost model (purchased with subsequent expenditure) and fair value model:
journals and disclosure
Fair value model: journals with deferred tax effect
Change in use and joint use properties: discussion in a letter format
Classification involving joint use properties and measurement involving choice
of models: discussion
Joint use properties: discussion
Chapter 12
157
Question 12.1
a) Explain the difference between an investment property and an owner-occupied property.
b) What are the two models allowed for investment properties and briefly explain how these
two models compare to the two models allowed for property, plant and equipment.
c) List the four scenarios under which a transfer may be made into investment property or
from investment property from/ to another asset.
Question 12.2
Splurge Limited is a dairy company and owns a farm (consisting of 200 hectares including a
total of five sheds), which it purchased for C2 000 000. Splurge Limited uses the farm for the
following;
one stand-alone shed is used for the milking of Splurge Limiteds cattle;
40 hectares surrounding the stand-alone shed is used for grazing for Splurge Limiteds
dairy cattle; and
the remaining 160 hectares of land and four other sheds are let to fellow farmers for
grazing of their own cattle and storage of fodder. The leases are non-cancellable
operating leases.
The 160 hectares of land together with the four sheds was purchased by Splurge five years
ago and has a separate title deed to the other 40 hectares (including the stand-alone shed).
Required:
Discuss how Splurge Limited should account for the farm in the financial statements in terms
of International Financial Reporting Standards. You may assume that Splurge Limited
intends to keep the farm in its existing use for the foreseeable future.
Ignore tax.
Question 12.3
Owlface Limited owns two buildings:
a head office building located in Quetta; and
another office building located in Karachi.
The office building located in Quetta is used as Owlface Limiteds head office. A minor
earthquake, on 30 June 20X5, destroyed this building,
The building in Quetta was purchased on the 1 January 20X5 for Cl 200 000 (total useful
life: 10 years and residual value: nil).
The property in Karachi was leased to a tenant, Spider Limited. After the earthquake, Owlface
Limited urgently needed new premises for its head office. Since Spider Limited was always
late in paying their lease rentals, Owlface Limited decided to immediately evict them and
move their head office to this building situated in Karachi.
Chapter 12
158
The building in Karachi was purchased on the 1 January 20X5 for C500 000.
On the 30 June 20X5, the fair value of the building in Karachi was C950 000.
There was no change in fair value at 31 December 20X5.
The total useful life was estimated to be 10 years from date of purchase and the residual
value was estimated to be nil.
Owlface Limited uses:
The cost model to measures its property, plant and equipment; and
The fair value model for its investment properties.
Required:
a)
Journalise the above transactions in the books of Owlface Limited for the year ended
31 December 20X5. Ignore tax.
b)
Define investment property and owner-occupied property.
c)
Define fair value and explain how it is calculated.
Question 12.4
Chattels Chief Limited owns an office block.
Chattels Chief Limited had occupied the office block from date of purchase until
30 June 20X5.
The office block had cost Cl 000 000 on 1 January 20X4.
Its residual value is estimated to be nil and total useful life is estimated to be 10 years
respectively (both estimates have remained unchanged).
On 30 June 20X5, Chattels Chief Limited moved out of the office block and thereafter
rented it to tenants under short-term operating leases.
The fair value of the office block was equal to its carrying amount on 30 June 20X5.
The fair value of the office block was C800 000 on 31 December 20X4 and Cl 500 000
on 31 December 20X5.
Chattels Chief Limited measures owner-occupied property using the cost model and
investment property using the fair value model.
Required:
a) Show all journals relating to the office block in the books of Chattels Chief Limited for
the year ended 3 1 December 20X5. Ignore tax.

b) If Chattels Chief Limited leases its office block to one of its subsidiary companies,
explain how the office block must be measured in:
Chattels Chief Limiteds financial statements; and

the group financial statements.
Chapter 12
159
Question 12.5
Snake Limited is in the construction industry. It constructs buildings for resale, for leasing
and for private use.
A building that Snake Limited had constructed in Islamabad (at a cost of Cl 000 000) had
been on the market for 2 years and was still not sold. On 1 March 20X5 Snake Limited
took it off the market and leased it instead. It was leased on 1 March 20X5. Its fair value
was Cl 500 000 on 3 1 December 20X5 and Cl 000 000 on 31 December 20X4.
The fair value of a building in Balochistan (rented out to tenants) has never been
determinable. This building was completed on 1 January 20X2 at a cost of C5 000 000.
Its total estimated useful life is 10 years and its residual value is Cl 000 000. Both
estimates have remained unchanged.
On 30 September 20X5, Snake Limited evicted the tenants from a building in Karachi
and moved its head office into the building instead. On this day, the fair value was C4
000 000, the remaining useful life was 5 years and the residual value was C500 000. The
fair value of this building was C3 000 000 on 31 December 20X4.
On 30 September 20X5, Snake Limited leased out the old head office building in Lahore.
The original cost was C4 000 000 (acquired on 30 September 20X3), on which date the
total useful life was 10 years and its residual value was nil. The fair value was
C3 700 000 on 31 December 20X5. The fair value on 30 September 20X5 was equal to
its carrying amount.
Rentals earned from the investment properties totalled C2 000 000.

*
Rates paid totalled Cl 000 000.
Snake Limited applies the fair value model to its investment properties and the cost model
to its property, plant and equipment.
Required:
Show the investment property note and the profit before tax note in Snake Limiteds
statements for the year ended 31 December 20X5.
Ignore tax and comparatives.
financial
Question 12.6
;
Tromp Limited is an investment company that purchases buildings and holds them for a
number of purposes, such as resale, leasing and its own use.
Tromp Towers
On 1 January 20X4, Tromp Limited purchased an old building for C300 000.
Conveyances fees amounted to C20 000.
This building has always been fully let out.
Chapter 12
160
This building is situated in an isolated part of Balochistan and there is no development

anywhere nearby. As a result there is no market for buildings in this area and therefore a
fair value is not reliably ascertainable.
On 31 July 20X4, the directors decided to repaint the building. The repainting was done at
a total cost of C50 000.
This building has never had an air-conditioning system.
After numerous complaints from
tenants about not being able to tolerate the Balochistan heat, Tromp Limited decided to
upgrade the building by installing a ducted air-conditioning system on 1 October 20X4.
The cost of installation included the following:
Adjustments to the structure of the building

Air-conditioning units
Installation costs
C
30000
200 000
50 000
On 31 December 20X4, a huge property boom took place in the area, with the result that
the fair value of Tromp Towers could now be determined. Tromp Limited does not,
however, wish to change their policy of measuring investment property using the cost
model.
The building has a 10 year useful life and a nil residual value.
The ducted air-conditioning system has a 10 year life and a nil residual value.
Tromp Limited also holds other investment property, all of which are carried under the fair
value model. The fair values are as follows:
C
1000 000
1 250 000
1 January 20X4
31 December 20X4
Required:
a) Journalise the entries that would arise from the above information for the year-ended
31 December 20X4.
b) Disclose the investment property note for the year-ended 31 December 20X4.
Ignore tax.
Chanter 12
161
Question 12.7
DCS Limited owns two buildings, each with a different purpose:
The Poplar; and
The Palms.
The Poplar:
DCS Limited had purchased this building on 3 1 July 20X4 for C500 000 cash.
The Poplar is a high rise building in the centre of Karachis central business district. This
building is leased out to corporate clients.
Its fair values are as follows:

3 1 December 20X4
31 December 20X5
31 December 20X6
C600 000
C700 000
C750 000
The Palms:
On 2 January 20X5, DCS Limited bought this property for C200 000 in cash.
Although no tenants would rent space in this building, DCS Limited identified that the
building would be a prime investment as the area around The Palms was being
extensively developed. Expectations are that, once this development is completed, this
property will attract a very high price, at which time the plan would probably be to sell it.
The property is not, however, held as inventory.
The buildings fair values were as follows:

3 1 December 20X5
3 1 December 20X6
C250 000
C400 000
Other information:
The tax authorities allow a deduction of 5% per annum on the cost of both these buildings
(not apportioned for part of a year).
Gain on immovable property is taxed at normal tax
rate of 30%. However the sale

proceeds of immovable property is restricted to the cost of the property for tax purposes.
Both buildings, when purchased, were determined to have useful lives of ten years and nil
residual values.
DCS Limited holds all investment property under the fair value model
Chapter 12
162
Required:
a) Prepare the journal entries to account for The Poplar for years-ended 3 1 December 20X4,
20X5 and 20X6.
b) Prepare the journal entries to account for The Palms for the years-ended 31 December
20X5 and 20X6.
Question 12.8
Cool Limited had its head office located in Timbuktu. It owned a building nearby that it
rented to Homeless Limited.
Unfortunately a tornado on 30 June 20X5 completely destroyed this building. Since

Homeless Limited was a valued tenant, Cool Limited decided to lease 60% of the head office
to them as a replacement.
Details relating to the head office are as follows:
purchased on the 1 January 20X5 for C600 000

total useful life: 10 years (residual value: nil)
fair values: C800 000 on 30 June 20X5 and C820 000 on 31 December 20X5.
it is not possible to sell or lease out this 60% portion of the building separately from the
rest of the building.
Cool Limited uses:
the fair value model to measure its investment properties; and

the cost model to measure its property, plant and equipment.
Required:
Write a letter to the financial director of Cool Limited explaining how the building should be
accounted for in the financial statements for the year ended 3 1 December 20X5. Suggested
journals should be included in your letter.
Use a single account to record movements in the head offices carrying amount.
Ignore tax.
Question 12.9
Uncertain Limited owns an office park that it developed during the current reporting period.
It is also a lessee in a number of properties held under lease agreements.
Uncertain Limiteds head office is situated in the office park in a stand-alone building. The
balance of the office park, containing 2 stand-alone properties, is let to tenants under noncancellable operating leases.
Chapter 12
163
The Chief Executive Officer of Uncertain Limited is unsure how to account for these
buildings. He assumes that the cost model would be the cheapest option to implement (as the
fair value estimates will not be needed) and have the least impact on the financial statements.
Required:
Discuss how Uncertain Limited should account for these buildings. Discuss whether the
Chief Executive Officers assumptions are correct.
Question 12.10
Gary Limited needs assistance in accounting for some of their properties
Required:
For the following properties discuss how they should be classified and measured in the
financial statements of Gary Limited.
The first 3 storeys are occupied by Gary Limited and used for
administration purposes. The top 3 storeys are vacant but are expected to be leased out in
the near future.
a) A block of flats.
b) A motel consisting of 10 rooms. Three of the rooms are used as an office by Gary
Limited while the other 7 are rented out. Ancillary services provided to the rooms are not
considered significant.
c) Fairvalue Limited, a subsidiary of Gary Limited, is a property dealer. Sales have dropped
recently. The directors of Fairvalue Limited have therefore decided to diversify their
business. One property, a block of flats, will now be refurbished and leased out under
operating leases. Another one of their properties that were previously held for sale, a
town house, will now be held for capital appreciation.
Chapter 12
164
Inventories
[Part 31
Chapter 13
Inventories
Question
13.1
13.2
13.3
13.4
13.5
13.6
13.7
13.8
13.9
13.10
Key issues
Accounting policies, basic notes

Inventory purchases involving discount: journals
Net realizable values: calculations
Fixed overheads, value of finished goods, cost and net realizable value
Cost of inventory with allocation of fixed manufacturing overheads:
calculations and journals
Cost of inventory (including allocation of fixed manufacturing overheads), net
realisable value and impairments: calculations, journals and disclosure
Fixed overheads: calculations of rate, capitalized and expensed portions
Manufacturing concern: journal entries
Manufacturing concern: cost of inventory (including allocation of fixed
manufacturing overheads), net realisable value and impairments: calculations
and disclosure
Measurement of inventory: short discussions
Chapter 13
165
Inventories
l
Question 13.1
The following draft accounting policy notes have been prepared for inclusion in your client's
annual financial statements.
Inventory is valued at the lower of cost and net realisable value.
Turnover comprises sales to customers and other revenue.
The following matters came to your notice:
The company is a manufacturing concern that employs a computerised perpetual inventory

costing system based on a program which charges out the oldest inventory first. This
program was introduced 4 years ago and is running smoothly. For costing and control
purposes the variable costing system is used but, for financial reporting purposes,
manufacturing overheads are absorbed on the basis of actual production for the year.
The company's main business is the sale of its finished products. However, it derives other
income from commission for introducing customers to a company servicing its products,
rental income from sub-letting a portion of its warehouse, and sales from a non-profit-making
canteen run for the benefit of the staff.
Required:
a)
Redraft the statement of accounting policies to comply with good disclosure and reporting
practice.
b) State what further information would be disclosed in the notes to the financial statements in
respect of items dealt with in the statement of accounting policies.
Question 13.2
Details of an acquisition of inventory by Prisma Limited are as follows:
Goods for resale where all purchased on credit on 1 July 20X9.

The marked price was C30 000, but a trade discount of C2 000 was successfully
negotiated along with an early settlement discount of 20% off the discounted price.
The settlement discount was offered on the condition that the amount due was paid in full
by 31 August 20X9.
The inventory was paid for on 2 September 20X9 due to cash flow problems.
Required:
Provide journal entries relating
accounting record:
to
the acquisition of the inventory in Prisma Limiteds
ChaDter 13
\&fs
Inventories
Question 13.3
Sheikar Limited manufactures 2 product lines: a moisturising lotion and a sun-block. The
following information relates to inventory on hand at 31 December 20X8:
Class of inventory
Cost
Raw materials
Used in moisturising lotion
Used in sun-block
NRV if
sold in
present
condition
NRV if
sold as
completed
NRV
product
140 000
65 000
75 000
60 000
60 000
55 000
80 000
Work in progress
Moisturising lotion
Sun-block
40 000
55 000
30 000
45 000
35 000
50 000
Finished goods
Moisturising lotion
Sun-block
190 000
90 000
100 000
N/A
140 000
80 000
95 000
N/A
Required:
Complete the table above for both scenarios (a) and (b) and determine the applicable net
realisable value of the different classes of inventory, and the total write down required:
Scenario a)
Assume the lifecycle of both the products is coming to an end and the
company has decided that it will sell the more profitable class of inventory
either in its present condition or converted into a completed product.
Scenario b)
Assume that it is the beginning of both of the products lifecycles and the
company intends to complete and sell both lines, regardless of profitability.
Question 13.4
Stocky Limited is a manufacturing company and is in its first year of operations. Stocky Limited
manufactures one product and has 500 units of finished goods of this product on hand at yearend, (there was neither raw material nor work-in-progress on hand at year-end). The bookkeeper
is unsure of how to treat fixed overheads and has left the fixed overhead costs for the year in a
suspense account. He has given you the following information:
Currency
Finished goods (closing balance)

- labour and other conversion costs (C3 per unit)
- materials (C2 per unit)
Fixed manufacturing overheads suspense account
Budgeted sales (12 months)
Budgeted production (12 months)
Actual production (12 months)
Actual sales (12 months)
_
Chapter 13
2 500
1 500
1 000
20 000
Units
500
20 000
40 000
25 000
24 500
167
1
i
i
id
inventories
The 500 units on hand at year-end were sold for an

before approval of the financial statements.
amount
of C3 000 after year-end but
Required:
a) Calculate the amount at which finished goods will be disclosed in the balance sheet for the
first year of operations. Show all your workings.

b) Assuming that:
the company also had work-in-progress on hand at year-end with a cost of C235 000
(correctly calculated);
the work-in-progress requires another C12 000 costs to be incurred in order to be
completed;
the product made by the company is fast becoming obsolete; and
the company plans to complete the work in progress and sell it at a mark-up of 15%
on cost (below the usual mark-up) with selling costs estimated at C42 000;
calculate at what value inventories would be shown on the face of the balance sheet for
the first year of operations. Show all your workings.
c) Assuming that the company also has raw materials of C20 000 at year-end, which had all
been offered as security for a loan, show the disclosure of inventory in the balance sheet
as well as the inventory note.
Question 13.5
Junior Unlimited manufactures tinned baby food. Junior Unlimited is in its first year of
operations and has estimated that a normal annual production level is 50 000 tins. Junior
Unlimited produced 30 000 tins during its first year of operations ended 31 December 20X1.
The annual stock count at 31 December 20X1 found 500 tins of finished goods. There is no other
inventory on hand at year-end other than these finished goods. The following information relates
to the manufacturing costs incurred during 20X1:
Direct materials purchased

Direct labour
Variable overheads
Fixed overheads
C4 per unit
C3 per unit
C2 per unit
C30 000 (annual)
Required:
a) Assuming the information given above:
i) Calculate the value of the inventory at 31 December 20X1;

ii) Calculate the portion of the fixed manufacturing overheads capitalised to inventory
during 20X1;
iii) Calculate the portion of the fixed manufacturing overheads still in the inventory asset
account at 31 December 20X1;
iv) Calculate the portion of the fixed manufacturing overheads that have been expensed
during 20X1;
Chapter 13
168
Inventories
v) Show all journals possible. Assume that ail transactions/ events were processed as single
transactions and that, where applicable, amounts were paid in cash;
vi) Calculate the amount at which cost of inventories expense will be disclosed in the
income statement for the year ended 3 1 December 20X 1.
b) Assuming that actual annual production totalled 60 000 units (instead of 30 000 units):
i) Calculate the value of the inventory' at 31 December 20X1;

ii) Calculate the portion of the fixed manufacturing overheads capitalised to inventor}'
during 20X1;
iii) Calculate the portion of the fixed manufacturing overheads still in the inventory asset
account at 31 December 20X1;
iv) Calculate the portion of the fixed manufacturing overheads that have been expensed
during 20X1;
v) Show all journals possible. Assume that all transactions/ events were processed as single
transactions and that, where applicable, amounts were paid in cash;
vi) Calculate the amount at which cost of inventories expense will be disclosed in the
income statement for the year ended 3 1 December 20X1.
Ignore tax.
Question 13.6
Buck Limited is a manufacturer of biltong products. The following information relates to its
financial year ended on 3 1 December 20X 1.
C
Balances at 31/12/20X0
Raw materials
Work-in-progress
Finished goods
100 000
250 000
150 000
Costs incurred during 20X1

Net cost of raw materials purchased during 20X1
Marked price of raw materials purchased during 20X1
Less trade discount received
Less cash discount received
Wages (60% manufacturing, 40% administrative): all variable
Variable overheads (60% production; 40% administrative)
Depreciation (80% on manufacturing plant; 20% administrative equipment)
Fixed overheads (70% being factory rent; 30% being managerial staff salaries
where these managers are not directly involved in the factory)
Transport costs
- inwards (i.e. relating to the purchase of raw materials)
- outwards (i.e. relating to the sale of finished goods)
Storage warehouse rent and insurance (annual)
Sales representative salaries (annual)
Cost of packaging (the biltong is gift wrapped in individual wooden boxes)
- wooden boxes purchased and used (biltong is gift wrapped in individual
wooden boxes)
- cardboard boxes used for transporting gift-wrapped biltong to sales outlets
Chanter 13
970 000
020
000
1
(20 000)
(30 000)
3 000 000
1 000 000
1 000000
1 000 000
100 000
50 000
100 000
400 000
300 000
500 000
169
Inventories
1
1
Buck Limited has an annual expected production level of 250 000 wooden boxes of biltong
but produced 200 000 wooden boxes of biltong in 20X1. Fixed overheads are allocated to
inventory on units of production. Depreciation on manufacturing plant is considered to be a
fixed cost.
30% of the cost of raw materials is still on hand at year end.
20% of the cost of work-in-progress is on hand at year end, the rest having been completed.
10% of the cost of finished goods is still on hand at year end, the rest having been sold.
No stocks of wooden or cardboard boxes are kept on hand; these are bought as required.
Required:
a) Journalise all information provided above. You may assume that each cost/ transaction was a
single transaction and that where relevant, the amount was paid in cash.
:
b) Soon after 31 December 20X1, the directors decided to cease the production of biltong boxes
and produce handbags instead. It has been decided that the raw materials on hand at
3 1 December 20X1 will be sold as is for C300 000. The selling costs thereof are expected to
be C50 000. The work-in-progress on hand at year end will be completed at an expected
cost of C100 000 and will sell for an expected amount of C700000 (selling costs are
expected to be C20000). The finished goods will sell for Cl 300 000 and will result in
selling costs of C80 000. Calculate the value at which inventories should be measured at
year-end and show any journal entries that may be necessary.
c) Disclose all information provided above in the financial statements of Buck Ltd for the year
ended 31 December 20X1 in accordance with International Financial Reporting Standards,
assuming further that C150 000 of the finished goods have been offered as security for a
loan.
Ignore tax.
Question 13.7
A factory with a financial year end of 31st December that started operations on 1 March 20X1
budgeted the following fixed costs:
C80 000
C40 000
Supervisor's salary per annum

Depreciation on equipment per annum
The supervisor is directly involved in the factory with
administration duties.
very
little of his time involved in
The company allocates fixed overheads based on units produced. The following information
relates to the production for the companys first period (10 months) of operation:
Budgeted production for the 10 month period

Budgeted sales for the 10 month period
Actual production for the 10 month period
Actual sales for the 10 month period
Chapter 13
20 000 units
15 000 units
12 000 units
10 000 units
1,
;
170
It!
Inventories
Required:
Based on the information given above, calculate:
a) the fixed overhead application rate to be used when valuing inventory at year end;
b) the amount of fixed overheads included in the closing balance of inventory (i.e. on
3 1 December 20X1); and
c) the
total
amount
of
fixed
overheads
expensed
during
the
period
ended
31 December 20X1.
Question 13.8
Widget limited is a manufacturer. Details of their current year inventory is as follows
Raw materials on hand at the beginning of the year was 10 000 kg at C4 per kg.
Cl 600 000 worth of raw materials at C4 per kg were purchased during the year.
100 000 kg of raw materials were used during the year.
Wages of C500 000 were paid.
The office telephone account of C20 000 was paid.
Electricity of C 10 000 was paid. Electricity is charged at C 0.1 per kilowatt. Each unit
uses 1 kilowatt. The rest of the bill reflected usage by the administration department.
A braai costing C8 000 was provided for the factory staff.
100 000 units were worked on during the year, of which 90 000 of these were completed
during the year with the remaining 10 000 units effectively complete at yearrend in that no
further costs are to be incurred. These 10 000 units still need to undergo the curing
process before being moved into the finished goods warehouse.
Finished goods on hand at the beginning of the year was 20 000 units. The costs per unit
in the current year are the same as in the prior year.
30% of all available finished goods were sold.
Fixed rent for factory and administration buildings totalled C400 000, 25% of w'hich is
used as office space.
Budgeted fixed manufacturing overheads are C300 000.
Budgeted production is 300 000 units (normal production).
All amounts were paid for in cash
Required:
Prepare journal entries to reflect the information presented above.
1A
171
Inventories
1
x;:
Question 13.9
Prena Limited manufactures bath oils. The following information is available for
January 20X8 (the companys first month of operation):
C
Raw material purchased (marked price inch 14% VAT)
605 000
Trade discount received
8%
Settlement discounts offered on purchases of raw materials
4 200
Settlement discounts received on purchases of raw' materials
3 200
Variable overheads (30% admin; 70% manufacturing)
100 000
Rent and insurance (see below)
200 000
Salaries and wages (see below)
500 000
Packing materials purchased (see below)
685 000
Other fixed overheads (65% manufacturing; 35% administration)
285 000
Rent and insurance for the 20X8 year was paid in full on 3 January 20X8. It is comprised
as follows:
Factory
Warehouse storage of work-in-progress while oils cools but before
the colourings are added
Shop where oils are sold to the public
140 000
30000
30000
Salaries and wages comprise of 55% manufacturing, 15% administration, and 30% sales
department salaries. Manufacturing salaries are considered variable with production,
while administration and sales department are fixed.
* Packing materials relate to the container in which the oils are placed before sale, and may
only be imported from the USA due to its specialized nature. The accountant erroneouslyconverted the dollar amount on the FOB date (free on board) instead of the CIF (costs
insurance freight) date. Risks and rewards of ownership were transferred on the date the
inventory arrived in. the Karachi Port. This was the first (and only) purchase of the
packing materials during January. Spot rates were as follows:
Order date
Date goods were loaded in USA harbour
Date of arrival in Karachi Port
FOB date
CIF date
$1: C6
$1: Cl
SI: C9
Other relevant information for January-:
75% of packing materials were used

20% of raw materials were on hand at month end
There was no work-in-progress at month end
80% of the finished goods produced were sold during the month
Normal production levels are estimated to be 18 000 units per annum. These 18 000 were
expected to be produced evenly over the 12 month period. The actual number of units
produced in January was 1 100 units.
Prema Limited is a VAT vendor. AH amounts exclude VAT unless otherwise indicated.
Chapter 13
172
Inventories
Required:
a)
Calculate the carrying amount of each category of inventory at 31 January 20X8 (show all
workings clearly).
b) Calculate the value at which the finished goods should be measured on the statement of
financial position as at 31 January 20X8, as well as the amount of any write down (if
required) assuming that:
on 3 1 January 20X8, a flood damaged most of the finished goods on hand;

expenditure to restore the goods to saleable condition is expected to be C90 000;
an advertising campaign for the clearance sale will cost approximately Cl 5 000; and
the oils may then be sold at a discounted price of C400 000.
c) Disclose the inventory note in the notes to the financial statements for the year ended
3 1 January 20X8 after taking into account the information in (b) above.
Question 13,10
Bilal Limited, an audit client of your firm, has approached you with the following questions
regarding inventory:
a) Fabric included in year end inventory includes fabric being shipped from USA on FOB
terms (risks and rewards are therefore transferred on date of shipment from the foreign
harbour). Delivery costs associated with this special fabric are excessive (C50 000 more
than normal delivery costs), but are required urgently for seamless production. Can this
C50 000 be included in the inventory value at year end?

b) The company used a consultant to design new baggies (a completely new product with
which the company has no experience), at a total cost of C30 000. This was a once-off
order for a large surf store chain. The baggies were complete by year end at a total
production cost of C500 000. Can the consultants fees be included in the inventory
valuation?
c) During the year, the company produced 85 000 T-Shirts and sold 75 000. Normal
production is 100 000 T-Shirts per annum, variable costs are C30 per unit, and annual
fixed manufacturing overheads amount to C700 000. Prepare journal entries to record
inventory and cost of sales for the year.
d) Fabric X used in production of the T-Shirts, is valued at C40 per metre, but can only be
sold at C35 per metre. Finished T-Shirts are expected to sell for C100 and cost C37 to
produce. At what value should Fabric X be recognised in the financial statements?
Required:
Respond briefly
to all
the above queries of your client.
Chapter 13
173
Statement of financial position disclosure : Assets
[Part 3j
Chapter 14
Statement of financial position disclosure: Assets
Question
14.1
Key issues
Accounting policies, property, plant & equipment, investments, inventory,
accounts receivable
14.2
14.3
14.4
14.5
Accounting policies, share capital, non-current liabilities, property, plant &

equipment, investments
Journal entries for revaluation of equipment, notes for property plant and
equipment, tax and deferred tax
Current tax and deferred tax, notes: current tax, deferred tax and property, plant
and equipment, sale of plant with capital profit
historic carrying amount with disclosure in the financial statements, includes
over and under-provision of tax
Chapter 14
175
Question 14.T
You have been provided with the following final balances, which have been extracted from the
general ledger of Misty Ridge Limited, as at 30 April 20X5:
MISTY RIDGE LIMITED

TRIAL BALANCE AT 30 APRIL 20X5
Debit
Accounts payable
Accounts receivable
Provision for doubtful debts
Bank overdraft
8% Convertible debentures
Land & buildings
Ordinary share capital - shares of Cl each
Patents and trademarks - carrying amount
Plant & machinery - carrying amount
Reserves
Inventory
Credit
294 600
472 700
9 200
18 400
50 000
638 000
26 400
45 000
175 000
1 507 800
575 700
1 906 400
1 906 400
Inventory
at
year end, which has been valued on a basis consistent with that of the
previous year, consists of:

196 400
177 300
202 000
575 700
Raw materials
Work-in-progress
Finished goods
Inventory is valued at the lower of FIFO cost and net realisable value. The cost of work-in
progress and finished goods include an appropriate portion of manufacturing overheads.
* Accounts payable consist of:

8 000
27 520
259 080
294 600
Dividends payable
Current tax payable
Trade payables
The companys land and buildings, which comprise factory and administration buildings,
They were purchased on
are situated on Plot 101/8, Industrial Area, Karachi.
out
April 20X4 totaled
during
carried
1 April 19W8 for C580 000. Improvements
The
other
only
improvements to the
C45 000, and are included in the figure of C638 000.
land and buildings had been undertaken in 20X0.
The movable assets register, which had not been updated to include the current years
transactions, reflected an accumulated depreciation balance for plant & machinery at
30 April 20X4 of C50 000. Depreciation in the current year amounted to C25 000 for
plant and machinery and is provided on the straight-line basis, at 10% p.a.
Chapter 14
176
./
The carrying amount of patents and trademarks amortised at 30 April 20X4 amounted to
55 000. The life of the patents and trademarks was considered to be ten years.
Reserves comprise:
Retained earnings
Capital redemption reserve
1 318 800
189 000
i 507 800
Overdraft facilities of the company are secured by a notarial bond on the moveable assets
of the company.
Accounts receivable includes an amount of C5 000 owing by the managing director.
The
balance outstanding on this loan at the beginning of the year was 015 000. No advances
were made during the year.
Required:
Prepare the non-current assets, current assets and current liabilities sections (with relevant
notes) of Misty Ridge Limiteds statement of financial position at 30 April 20X5, in
compliance with International Financial Reporting Standards.
Accounting policy notes should be provided in respect

inventory only.
of property, plant
& equipment and
Question 14.2
Aubergine Limited is a small listed public company, situated on the coastal area. The following
information refers to Aubergine Limited at 30 June 20X9.
The authorised share capital consists of:
1 000 000 ordinary shares of Cl each

100 000 6% redeemable preference shares of Cl each
The company was incorporated ten years ago and shares have been allotted as follows:
856 800
100 000
ordinary shares of Cl each.

6% redeemable preference shares of Cl each at par redeemable at the option of
the company at a premium of C0.30 per share at any date after 30 June 20X8.
After all the adjustments (excepting those relating to the property, plant and equipment) at
30 June 20X9 were made, the balances on the following accounts were:-
Non-distributable reserve
Retained earnings at 1 July 20X8
Retained earnings for the current year
150 000
290 000
78 000
On 2 January 20X4, 1 000 ten percent debentures of C100 each were allotted. These
debentures are redeemable at par in equal annual drawings of CIO 000. The first drawing
fell due and was paid on 31 December 20X7, and all subsequent drawings have been paid
on time. Interest is payable half yearly on 30 June and 31 December of each year.
Chapter 14
177
The 10% debentures are secured by first mortgage over land and buildings situated on 82-E,
Port Qasim. The land and buildings were acquired on 1 June 20X4 for Cl 200000. In
20X6 they were revalued to Ci 350 000 and it was decided that land and buildings would be
revalued every three years. In June 20X9, Mr Eng of Consulting Engineers CC valued the
property at Cl 180 (XX) due to a decline in the property market in the area.
Plant and machinery at cost less accumulated depreciation at 30 June 20X9 amounts to
C90000. All plant and machinery' was acquired on 1 July 20X7 and depreciation is being
written off at 20% per annum on the straight line basis.
Furniture and fittings at cost at 30 June 20X9 amounts to C14 000, and accumulated
depreciation at that date amounts to C6 000 (20X8:C5 500). New furniture costing C4 000
was purchased on 30 June 20X9.
Accounts receivable at 30 June 20X9 amounted to C79 000.
Inventory is valued at cost using the first in first out method and comprises merchandise
only. Total inventory at 30 June 20X9 is C65 000.
A final dividend of 5% on all issued ordinary shares and the preference dividend was
declared but unpaid at year end. These amounts, together with an accrual for taxation of
C18 700 were included in accounts payable totalling C101 400.
There was a bank balance at 30 June 20X9 of C64 200.
Required:
Prepare the statement of financial position and supporting notes of Aubergine Limited
30 June 20X9 in compliance with International Financial Reporting Standards.
Accounting policies are required for statement
plant and equipment and inventory only.
at
of compliance, basis of preparation, property
Comparativefigures are not required.
Question 14.3
Adare Limited is a company involved in the manufacturing and distribution of woolen items
such as blankets, jerseys and scarfs. The company began operations on 2 January 20X3,
renting premises in Rawalpindi.
On 2 January 20X3, the company purchased equipment as well as a large delivery vehicle.
Both the equipment and the vehicle were available for use as intended by management from
the date of purchase.
The equipment was purchased for an amount of C2 736 000, inclusive of VAT. The
estimated useful life is five years with no residual value. The tax authorities allow a tax
allowance of 33 1/3 % per annum on the straight line basis. On 1 January 20X4, the
equipment was revalued by an independent sworn appraiser to a fair value of C5 000 000,
using the net replacement cost method. The estimated useful life remained unchanged. It is
the intention of the company to keep the equipment. The company has a policy to transfer the
revaluation surplus to retained earnings as the asset is used by the entity.
Chapter 14
178
The vehicle was purchased for an amount of Cl 368 000, inclusive of VAT. The vehicle is
depreciated at 20% per annum on the straight line basis with no residual value. The tax
authorities allow a tax allowance of 3314 % per annum on the straight line basis. By the end
of the 20X4 year, management realised that the vehicle was too big and it was sold on
3 1 December 20X4 for an amount of C 1 500 000.
The company tax rate was 30% during the year ended 31 December 20X3. However, with
effect from 1 January 20X4 the Minister of Finance announced a change in the company tax
rate to 29%. The VAT rate is 14%.
The profit before tax for the year ended 3 1 December 20X4 has been correctly calculated at
C2 900 000. Dividend income amounted to C40 000 and was received during January 20X4.
Dividends of C52 000 were declared during February 20X4 in respect of the 20X3 year while
dividends of C45 000 were declared during February 20X5 in respect of the 20X4 year.
Adare Limited is a registered VAT vendor.
Required:
a) Prepare all the journal entries relating to the equipment for the year ended
31 December 20X4.
Entries relating to taxation and deferred taxation are required.

b) Prepare the notes to taxation and deferred taxation for the 20X4 financial statements.
Comparative figures are not required.
c) Prepare the notes to property, plant and equipment for the 20X4 financial statements.
Question 14.4
Read Limited publishes magazines in the areas of health and fitness. The financial director is
in the process of preparing the financial statements for the year ended 3 1 May 20X6.
The following information is taken from the working papers:
tax (including depreciation and profit on sale of plant) for the year ended
31 May 20X6 amounts to Cl 720 000.
* Profit before
e
All of the companys equipment was purchased on 1 March 20X2 at a cost of Cl 000 000
and at that date the residual value was estimated at C200 000. The residual value
remained at C200 000 for the 20X2, 20X3 and 20X4 financial years. At the end of the
20X5 financial year the residual value was estimated at C355 000. The company accounts
for depreciation on plant on the straight line basis over its useful life of ten years. The
allowance granted by the tax authorities is 20% per annum on the straight line basis,
apportioned for time. The equipment was sold on 28 February 20X6 for Cl 500 000.
The directors decided to rent equipment (valued at Cl 500 000) for a short period so that
the latest model could be purchased. New equipment was purchased on 1 May 20X6 at a
cost of Cl 800 000. Costs of testing the equipment amounted to C200 000 and costs of
staff training and preparing the manuals amounted to CIO 000. The plant became
available for use on 3 1 May 20X6.
Chapter 14
179
1
I
An extract from the current assets and current liabilities sections of the draft statement of
financial position at 31 May 20X6 is as follows:
20X6
20X5
Current assets
Accounts receivable
Rent prepaid
Interest accrued
3 750 000
30 000
25 000
3 240 000
40 000
20 000
Current liabilities
Accounts payable
Subscriptions unearned
Advertising accrued
Current tax payable
2 574 000
10 000
15 000
?
1 984 000
30 000
10 000
8 800
The following comments have been provided by the companys tax consultant:
Prepaid expenses are deductible for tax purposes when paid;

Accrued income is taxed in the year of accrual;
Unearned income is taxed when received; and
Expenses accrued are deductible in the year of accrual.
Dividends declared and paid during the year ended 31 May 20X6 amount to C50 000.
Dividends received during the same period amount to C60 000. The company intends to
increase its dividends by 5% each year. The company has also sold the dividend-yielding
investments at the end of the financial year. Dividend income is taxed @ 10%.
The tax assessment for the year ended 31 May 20X5 was received during March 20X6
and showed an assessed tax on taxable profit of C240 000 for the year. The amount
owing was paid immediately. The current tax provided in the 20X5 financial statements
amounted to C237 250 and provisional tax payments totaled C228 450 for that year.
Provisional tax payments amount to C450 000 for the 20X6 year of assessment, excluding
the provisional payment made during March.
stated above. The rate of normal company tax is 29%.
I
Required:
a) Prepare an extract from the statement of comprehensive income of Read Limited for the
year ended 3 1 May 20X6.
b) Prepare all the journal entries relating to taxation for the 20X6 year
c) Prepare the notes to the financial statements for the 20X6 year in respect of taxation,
deferred taxation and property, plant and equipment only, in accordance with the relevant
IFRS.
Comparatives are not requiredfor the taxation note.

equipment note.
for the deferred
tax note
and the property, plant and
Chapter 14
180
Gripping SFRS : Graded Questions
Question 14.5
Environmental Limited is a small company listed on the Karachi Stock Exchange. It
manufactures a range of energy-saving and environmental friendly household appliances.
The year-end of the company is 30 June.
An extract from the trial balances of Environmental Limited at 30 June 20X6 and 20X7 are
shown below. All amounts shown on the trial balances are correct.
ENVIRONMENTAL LIMITED
(EXTRACT FROM) TRIAL BALANCE AT 30 JUNE
20X7
Debit
Retained earnings (at beginning of
year)
Profit before tax
Deferred tax
Current tax payable
Plant
Accumulated depreciation : Plant
Interest received in advance
Rent prepaid
Telephone expense accrued
20X6
Credit
Debit
880 000
?
?
Credit
2 300 000
1 100 000
40 890
4 875
825 000
0
15 000
?
12 000
8 000
6 000
3 850
3 600
The company purchased its only item of plant on 1 July 20X5. It was installed and available
for use in the manner intended by management on the same day. The cost of the plant was
C900 000. It has an estimated useful life of four years and zero residual value. The Tax
authority allows a tax allowance of 25% per annum.
Environmental Limited uses the revaluation model for the measurement of its property, plant
and equipment and due to the nature of its operations, the company has a policy of revaluing
its property, plant and equipment on an annual basis. The net replacement value method is
used. The directors transfer the revaluation surplus to retained earnings as the asset is used by
the entity.
The fair value of the plant was estimated using discounted cash flows by an independent
valuer at 30 June 20X6 and 30 June 20X7 as shown in the following table. The useful life
and residual value remained unchanged.
Fair value
Date
30 June 20X6 R 825 000
30 June 20X7 R 400 000
The tax assessment for the year ended 30 June 20X6 was received on 15 October 20X6 and
reflected assessed tax of C326 750. The notes to the financial statements for the year ended
30 June 20X6 reflected a current tax expense of C322 850. The company made a third
provisional payment on 20 October 20X6.
Chanter 14
181
Gripping IF RS : Graded Questions
Provisional tax payments made during the year were as follows:

Date
30 December 20X6
30 June 20X7
Amount
R 150 750
R 182 250
The corporate tax rate is 29% and has not changed for the past three years.
Required:
a) Prepare extracts from the statement of comprehensive income and statement of changes of
equity of Environmental Limited for the year ended 30 June 20X7 and extracts from the
statement of financial position at 30 June 20X7, relating to plant and to taxation.
b) Prepare extracts from the notes to the financial statements of Environmental Limited at
30 June 20X7, relating to plant and to taxation.
The accounting policies for property, plant & equipment and deferred tax are required.
Accounting policies
required.
for
statement
of compliance and basis of
preparation are not
Chapter 14
182
II
Share capital
iParl4j
Chapter 15
Share capital
(
Question
15.1
15.2
15.3
15.4
15.5
15.6
15.7
15.8
15.9
Key issues
Ordinary shares: rights issue and capitalisation issue: journals
Statement of changes in equity, share capital disclosure and EPS
Redemption of preference shares at a premium, issue of debentures, issue of the
minimum number of ordinary' shares
Redemption of preference shares at a premium, issue of ordinary shares
Redemption of preference shares at a premium, issue of ordinary shares:
disclosure and journals
Journal entries, redemption of preference shares at a premium, issue of the
minimum number of ordinary shares
Redemption of preference shares at a premium, issue of ordinary shares
Redemption of preference shares, restriction on use of share premium
Classification of redeemable preference shares: discussion, calculations and
correcting journals
Chapter 15
183
Share capital
Question 15.1
The following information relates to Bear Limiteds share issues during the year ended
31 December 20X4:
Rights issue: 10 000 ordinary shares were offered to existing shareholders at C6 each on
30 May 20X4, when the market price was C9 each. All 10 000 shares offered were taken
up on this day.
Capitalisation issue: there was a capitalisation issue of 2 ordinary shares for every 5
shares in issue on 30 November 20X4. The capitalisation issue utilised the share
premium as far as is possible. The directors agreed that the impact of the capitalisation
issue on the retained earnings should be minimized as far as possible.
Share issue expenses were Cl 5 000 during 20X4.
The share premium account had a balance of C30 000 on 3 1 December 20X3.
The number of ordinary shares in issue on 1 January 20X4 was 270 000.
There is a large balance in the retained earnings account.
There are no other share issues or reserves other than those mentioned above.
i
Required:
Prepare all the journal entries relating to the transactions mentioned above for the year ended
31 December 20X4.
Question 15.2
Wolverine Limited is a manufacturer and wholesaler of high density metals and metal
products. The company is renowned for its production of indestructible metal claws used in
industrial processes. The company has been very profitable since its inception fifteen years
ago. The company has a 31 March year end. The financial director Logan Wolff has
approached you for assistance in preparation of the financial statements.
An extract from the audited statement of financial position as at 31 March 20X1 showed the
following balances:
f.
EQUITY AND RESERVES
Ordinary share capital (C1 each)

12% Non-cumulative preference share capital (C5 each)
Share premium
Retained earnings
Chapter 15
1 800 000
500 000
150000
100 000
9 500 000
12 050 000
184
Share capital
The total comprehensive income earned for the subsequent two years is as follows:
20X3
C
1 100 000
50 000
1 150 000

20X2
c
930 000
930 000
The total comprehensive income for the period has been calculated after taking into account
the following items:
Debit /(Credit)
20X3
C
70 000
Depreciation
Profit on sale of motor vehicles
Amortisation of patents
Impairment of goodwill
Research costs expensed
Emergency repairs to computers
Inventory write-down
Reversal of inventory write down
Reversal of impairment loss on plant
Effect of change in tax rate
Audit fees
Entertainment
Legal fees - debt collection
Revaluation of plant and equipment
20X2
c
60000
(20000)
20 000
40000
23 000
300 000
15 000
40 000
18 500
5 000
(3 000)
(20 000)
(8 200)
80 000
4 000
200
50 000
76 000
4 500
100
The following additional information is relevant:

issued share capital at 1 April 20X1 consisted of 1 800 000 shares of Cl

each. The authorised share capital has remained unchanged at 5 000 000 since
incorporation.
* The ordinary
On 1 July 20X1, 200 000 additional shares were issued at Cl.20. The directors wives
took up 50 000 of the shares in total. The share issue expenses for this issue amounted to
CIO 000.
On 31 December 20X2, the directors authorised a capitalisation issue of 1 share for every
4 held.
An ordinary dividend of C0.05 per share was declared on 28 February 20X3. No

dividend was declared in the 20X2 financial year.
In terms of members resolution 101, the un-issued shares remain under the unrestricted
control of the directors until the next annual general meeting.
Preference share capital
The preference shares are not redeemable.
Chapter IS
185
Share capita!
All the authorised preference share capital has been issued.
* The preference dividends were paid on 10 October in both years.

The non-distributable reserve relates to the revaluation of plant and equipment.
Retained earnings and share premium
The share premium arose on the original issue of the preference shares.
It is the companys policy to maintain its retained earnings at the highest possible level
and to utilise the share premium account to the maximum extent possible.
Tax effects
The motor vehicle was sold for less than the original cost.
The impairment of goodwill is not deductable for tax purposes.
* The corporate tax rate is 30%.

Required:
a) Prepare the statement of changes in equity for the year ended 31 March 20X3 in

b) Prepare the notes to share capital, earnings per share for year ended 3 1 March 20X3 in

Question 15.3
Klaus Limited has an authorised share capital of 300 000 ordinary shares of Cl par value and
100 000 redeemable preference shares of Cl each. Its issued share capital consists of 200 000
ordinary shares of C215 000 and 100 000 16% redeemable preference shares issued at par. In
terms of the Articles of the company, the preference shares are redeemable at a premium of
3% at the option of the company any time after 1 April 20X3.
The preference shares were redeemed at a premium of 3% on 30 June 20X5. All dividends
due had been paid on 29 June 20X5.
In order to finance the redemption, on 30 June 20X5 the company issued 30 000
Cl debentures at a discount of 2% and the minimum number of ordinary shares required at
Cl.25. Retained earnings amount to 040 000 on 30 June 20X5. The company wishes to
minimise the use of its retained earnings account.
The directors are satisfied that the companys assets, fairly valued exceed its liabilities and
that the company will be able to pay its debts as they become due.
Chapter 15
186
<
'
||
l
Share capital
Required:
Show the relevant extracts from the statement of financial position, statement of changes in
equity and notes thereto at 30 June 20X5 in terms of International Financial Reporting
Standards and the Companies Ordinance, 1984.
Question 15.4
The following information was extracted from the records of Century Limited at 29 April 20X9:
Authorised share capital

300 000 ordinary shares of C2 each
120 000 15% redeemable preference shares of C0.50 each
220 000 ordinary shares of C2 each
120 000 15% redeemable preference shares of C0.50 each
Retained earnings
Cash at bank
600000
60 000
660 000
440000
60 000
500000
120000
8000
The redeemable preference shares are redeemable at the option of Century Limited. The board
of directors of Century Limited passed a resolution in terms of which the preference shares are
to be redeemed on 30 April 20X9 at a premium of C0.05 per share. The redemption as well as
the preference dividend is financed out of:
the funds in the bank account

a secured loan of C40 000 at 14%
the balance from a fresh issue of ordinary shares at an issue price of C2.50
The directors have resolved further that
the share premium account is to be used to the maximum extent possible;

a balance of at least C70 000 is to remain on the retained earnings; and
a balance of C3 000 is to remain in the bank account.
Other information relating to the ordinary share issue:
share issue expenses of Cl 200 incurred and paid from existing funds in the bank account
are written off against retained earnings;
there was no balance on the share premium account before the issue of ordinary shares (and
no other equity accounts other than those evident from the information provided).
The financial year end is 31 December when the annual preference dividend is declared. The
preference dividend will be paid to the date of redemption.
1C.
187
Share capital
Required:
a) Calculate the number of ordinary shares that the company will issue.
b) Prove that your scheme will fulfil the directors' requirements by showing the retained
earnings and cash accounts.

i
Question 15.5
Yusuf Ltd is a company listed on the JSE Securities Exchange. The financial director is
currently preparing the financial statements for the year ended 31 December 20X3. The
following information relates to its share capital:
Number
- there
1 000 000
10% C3 preference shares, (issued at par on 1 January 20X1) compulsorily

redeemable at a premium of C0.50 per share on 31 December 20X3
1 000 000
Ordinary shares of C2 par value, (issued at C2.20 on incorporation

were no share issue expenses on this issue)
The effective interest rate on the preference shares is 14.8084%.

The redemption of the preference shares is to be financed as follows:
a bank loan of Cl 800 000 raised on 31 December 20X3, repayable on 31 December
20
X6; and
the issue of as many ordinary shares as is necessary at an issue price of C2.50 each (there
are 3 million authorised shares still available for issue).
Preference dividends are always declared and paid on 31 December of each year. The
preference dividends declared on 31 December 20X3 will, together with the share issue costs
of C20 000, be paid out of currently available cash resources. No ordinary dividends were
declared in 20X3.
On 1 January 20X3, the balance in the retained earnings account was C4 000 000 and the
balance in the share premium account was Cl50 000. The profit for 20X3 w;as Cl00 000
before taking into consideration the information presented above.
Required:
a) Prepare the effective interest rate table from the date the preference shares were issued to
the date on which they were redeemed.
b) Disclose the preference shares on the face of the statement of financial position as at
31 December 20X2 presenting 20X1 as comparatives in as much detail as is possible,
Share capital
c) Calculate the number of shares to be issued on 31 December 20X3 in order to finance the
redemption of the preference shares.

d) Show all journal entries relating to the information provided above for the year ended
31 December 20X3.
Question 15.6
Emnet (Private) Ltd w'as incorporated on 1 January 20X5 with an authorised share capital of
3 10 000 ordinary' shares and 50 000 10% redeemable preference shares of C2 each which are
subject to compulsory redemption on 3 1 December 20Y0 at a premium of C0.20 per share.
On 2 January 20X5 all the preference shares were issued at par and 300 000 ordinary shares
were issued for C300 000. On 2 January 20X8 an additional 100 000 ordinary shares were
issued for C145 000.
Emnet (Private) Ltd's financial year end is 31 December. Preference dividends are paid
annually on 31 December.
On 3 1 December 20Y0 the directors resolved the following with regard to the redemption of the
preference shares:
The preference shares are redeemed at a premium of C0.20 per share as authorised by the
articles of association.
The redemption of the preference shares (together with the preference dividends due for
20Y0) will be partially financed by the issue of the remaining authorised ordinary shares at
C2.40 each. The required number of shares were subscribed for and allotted. The balance
of the funds needed to finance the redemption will be obtained from the issue of 10%
debentures of CIO each. The balance of C20 000 in the bank account is not to be used to
finance the redemption.
Required:
Prepare the journal entries (including cash transactions) to record the transactions in the
accounting records of Emnet (Private) Ltd for the year ended 31 December 20Y0.
Question 15.7
On 28 February 20X5 RFK Limited had, amongst others, the following balances in its
accounting records:
Ordinary share capital (shares of Cl each)

12% redeemable, cumulative preference share capital (shares of C2 each)
Share premium
Retained earnings
Bank overdraft
Profit before finance charges and before tax
rhonfpi* 1$
C
400 000
157 500
480000
115 000
30000
98 000
189
Share capita!
The authorised share capital of the company comprises i 000 000 ordinary shares of Cl
each, and 100 000 preference shares of C2 each.
The preference shares were issued on 1 March 20X0 at par, and are redeemable at the
option of the shareholders on 28 February 20X5 at a premium of CO.10.
The directors have been granted a general authority by the annual general meeting to issue
shares at their discretion.
In finalising the financial statements, the following information in relation

shares must still be accounted for:
to
the preference
The redeemable preference shares are redeemed at C2.10 per share on 28 February 20X5 in
accordance with the articles of association. The redemption is financed as follows:
100 debentures of C250 each

as many ordinary shares at Cl.25 each as are necessary to have sufficient cash for the
redemption.
The dividends on preference shares must still be accounted for, and will be financed from
the existing bank overdraft.
Share issue expenses of C9 000 were incurred. These costs are to be financed by extending
the bank overdraft.
The share premium account must be utilised to the maximum extent possible.
Required:
Prepare the equity and liabilities section of the statement of financial position at 28 February
20X5 as well as the statement of changes in equity for the year ending on that date.
Accounting policies and notes relevant to the ordinary share capital and preference shares
are required,
Comparativefigures are requiredfor the statement of financialposition.
Chanter 15
Share capital
S3
Question 15.8
Easyfly Limited is a small tour operator. The statement of financial position of Easyfly
Limited at 31 August 20X5 is shown below:
EASYFLY LIMITED
AT 31 AUGUST 20X5
C
ASSETS
Non-current assets
Current assets
Accounts receivable
Bank
125 000
24 150
75 850
225 000

Capital and reserves
Share capital (100 000 Cl Ordinary Shares)
Share premium
Retained earnings
Current liabilities
10 % Redeemable preference share
100 000
20 000
51 230
53 770
225 000
The company issued 50 000 10% redeemable preference shares of Cl each on

1 September 20X1 which are subject to compulsory redemption on 31 August 20X6 at a
premium of CO. 10 per share. The effective interest rate on the preference shares is
11.5870684%.
The terms of the articles of association allow for a premium on redemption of preference
shares of CO.10 per share.
The redemption of the preference shares is to be financed as follows:
C32 500 of the existing cash reserves is to be used

the remainder is to be financed by the issue of as many ordinary shares as is necessary at
a premium of C0.50 per share.
The preference dividend as well as the share issue costs of C2 750 will be settled out of
currently available cash resources. No ordinary dividends were declared during 20X6.
The share premium account is to be used to the maximum possible amount.
The profit before

C120 000.
tax
for the period ending 3 1 August 20X6 has been correctly calculated at
191
Share capital
Required:
a) Prepare all journal entries relating to the information provided above for the year ended
31 August 20X6.
b) Show how taxation will be disclosed in the notes to the financial statements for the year
ending 31 August 20X6.

Workings
to be rounded to
the nearest rand.
Question 15.9
You are the newly appointed auditor of Keeptrying Ltd, charged with the responsibility of
ensuring that the equity and liabilities section of the statement of financial position is fairly
reflected. The following extract from the draft statement of financial position and additional
information relevant to the current financial year ended 31 December 20X4 has been given to
you:
'
KEEPTRYING LIMITED
EXTRACTS FROM STATEMENT OF FINANCIAL
POSITION
_
AS AT 31 DECEMBER 20X4
Preference share capital: 10% cumulative, redeemable Cl shares
1
20X4
C
20X3
100 000
300 000
100 000
300 000
100 000 ordinary shares of Cl each were issued on 1 January 20X1.
300 000 redeemable preference shares, each with a coupon rate of 10% and a par value of
Cl, were issued on 1 January 20X3. These shares are compulsorily redeemable on
31 December 20X5 at a premium of CO.10 per share. The effective interest rate is
12.937%.
The preference dividends are declared and paid on 3 1 December each year.
Share capital
Journal entries processed to date in respect of the preference shares are as follows:
Debit
Credit
1 January 20X3
Bank
Preference shares
Issue of preference shares
31 December 20X3
Preference dividend
Bank
31 December 20X4
Preference dividend
Bank
300 000
300 000
30 000
30 000
30 000
30 000
Required:
a) Provide the following definitions per the Framework:
i) Liability
ii) Equity
iii) Expense
b) Discuss the recognition of the following transactions:
i)
The issue of the preference shares in terms of the liability and equity definitions.
ii) The redemption of the preference shares on 3 1 December 20X5 in terms of the
expense definition.
c) Prepare the entire effective interest rate table and state the balance at which the preference
shares should be measured in the statement of financial position of Keeptrying Ltd at
31 December 20X4.
d) Provide the accountant with correcting journal entries where considered appropriate.
Ignore taxation.
193
ft
[Part 4|
Chapter 16
Question
16.1
16.2
16.3
16.4
16.5
16.6
16.7
16.8
16.9
16.10
16.11
16.12
16.13
16.14
16.15
Key issues
Issue at a premium, redemption at par
Issue at a discount, redemption at a premium
Issue at par, redemption at a premium
Financial risks and mitigation thereof: discussion
Redeemable debentures: calculations and statement of comprehensive income
disclosure
Redeemable debentures: discussion
Convertible debentures: journals
Preference shares: redeemable/ convertible preference shares: journal entries
Preference shares: compulsorily redeemable preference shares and compulsorily
convertible preference shares: discussion and correcting journal entries
Options, ordinary shares and preference shares: classification, measurement
calculations and journal entries
Compound financial instruments: discussion and accounting treatment
Financial assets: classification and journals
Foreign available for sale financial asset: brief discussion and journals
Various financial instruments: journals
Investments in shares and gilts: journals
Chapter 16
195
Question 16.1
Aarhus Limited issued 80 000 12% debentures of C2 each on 1 July 20X3 at a premium of
3%. The debentures have been issued at an effective interest rate of 11.48029%. These
debentures will be redeemed at par in 10 years time, on 30 June 20Y3. The debentures are
unsecured.
Required:
Show the relevant extracts from the statement of comprehensive income, statement of
financial position and notes to the financial statements of Aarhus Limited for the years ended
30 June 20X4, 20X5 and 20Y2.
Question 16.2
Bergen Limited has a 31 December year end. The company issued 100 000 10% debentures
of Cl each at a discount of 5% on 1 October 20X1. The debentures are redeemable at a
premium of 7% on 30 September 20X5. The debentures have been issued at an effective
interest rate of 13.03192248%. Interest is payable on 31 March and 30 September each year.
Required:
a) Prepare all the journal entries relating to the debentures that would be processed from
1 October 20X1 to 30 September 20X5.

b) Show how the debentures would be disclosed in the financial statements of Bergen
Limited at 31 December 20X2.
Question 16.3
Elk Limited issued C100 000 debentures on 1 January 20X1 at par. Interest at the rate of 12 %
p.a. is payable on 31 December each year. The debentures are to be redeemed at a premium of
26.262% on 31 December 20X6. The premium was calculated so that the effective cost of the
debentures after providing for the premium on redemption, would be 15% p.a.
The amount that will be required for the premium on the redemption of the debentures is to be
provided for over the life of the debentures using the effective rate of interest method.
The debentures are secured over the land and buildings of the company.
The companys financial year end is 31 December.
Required:
a) Prepare an amortisation table showing the amount of premium that would be provided each
year over the life of the debentures.

b) Prepare all the journal entries relating to the debentures from the 20X1 financial year to the
end of 20X3.
c) Show how matters relating to the debentures would be disclosed in the financial statements
and notes of Elk Limited for the 20X3 financial year end.
Chapter 16
196
;;
Question 16.4
Blues Limited, a South African company whose currency is Rands (R), manufactures
specialized musical instruments. Since Blues Limited was incorporated in the current year it
was unable to raise a loan from a large banking house and was forced to finance the purchase
of factory machinery through:
The issue of debentures to the value of R500 000 (at a 10% fixed rate); and
A loan of R1 000 000 (at a variable rate of prime plus 15%) from Shark Limited a small
lending house.
Both the factory machinery and the raw materials used in the manufacture of the musical
instruments are supplied by Country Limited, an American company.
The musical instruments manufactured are sold in both Durban (South Africa) and London
(Great Britain), although the majority of the customers are Londoners. Blues Limited offers
all its customers 60 days credit.
An extract of Blues Limiteds Trial Balance as at 3 1 December 20X5 is as follows:
Debit
Foreign creditor: Country Limited (US Dollars: 125 000)

Foreign debtors: various (GB Pounds: 30 000)
Inventory
Debentures
Loan: Shark Limited
Sales: local
Sales: foreign
Credit
900 000
300 000
600 000
500 000
1 000 000
50 000
700 000
Required:
a) List the financial risks listed in IFRS 7 to which an entity can be exposed.
b) Discuss the various financial risks to which Blues is currently exposed. Your answer
should include the definition of each risk discussed.
c) Discuss how Blues may limit their exposure to these risks.
Question 16.5
On 2 January 20X5, Tinkerbell Limited issued 1 million C5 10% debentures at a discount of
Cl per debenture. The debentures are compulsorily redeemable, on 31 December 20X9, at a
premium of C1.23 per debenture. The internal rate of return is 19.992737%.
Required:
Determine the amount to be recognized as finance costs for each of the affected financial
years ending 3 1 December and show how these amounts would be disclosed in the statement
of comprehensive incomes of Tinkerbell Limited.
Chapter 16
197
Question 16.6
Backstab Limited issued 200 000 C20 par value debentures on 1 January 20X6. These
debentures:
were issued at a discount of 20% on par; and
are redeemable at a premium of C3 over par value on 1 January 20X9;
bear interest at 12% per annum, payable annually in arrears. The internal rate of return is
26.33586%.
Backstab Limiteds accountant processed the following journal entries in respect of these
debentures for the financial year ending 3 1 December 20X6.
Debit
1 January 20X6
Bank
Non-current interest bearing liability
Issue of debentures
3 200 000
3 200000
31 December 20X6
Finance costs - debenture interest
Interest payable
Accrual of interest on debentures
Credit
480 000
480000
The tax authorities apply the effective interest rate method to financial liabilities and levy
normal income tax at 30%.
Required:
Evaluate Backstab Limiteds accounting treatment of the compulsorily redeemable debentures
for the year ended 3 1 December 20X6.
Question 16.7
Sharks Limited is a company that is involved in the retail of sporting goods. Due to the
massive increase in demand for the merchandise sold by Sharks Limited, they believed it was
necessary to build a massive sporting goods mall. This mall only sells sports-related goods.
In order to raise the required capital, Sharks Limited issued 100 000 CIO debentures on
1 January 20X6. The details of the debentures are as follows:
The debentures were issued at a premium of Cl per debenture
The coupon rate is 15%
The debentures are compulsorily convertible into ordinary shares on a 1 for 1 basis on
31 December 20X9.
An appropriate discount rate for debentures of this nature is 20%.
Chapter 16
198
Required:
Journalize the entries required to
31 December 20X6 to 20X9.
account
for the above information for the years ended
Question 16.8
Paw Paw Limited issued 1 000 000 C5 10% cumulative preference shares at par on
1 January 20X5. These shares are, at the option of the holder, either convertible into ordinary
shares or redeemable at par on 31 December 20X8:
On 31 December
20X8, 80% of the shareholders decided to convert their preference

shares into ordinary shares and 20% of the shareholders opted for the cash back instead.
The market interest rate for these preference shares is 12%.
Required:
Prepare the journal entries for the share issue in the books of Paw Paw Limited for the years
ended 31 December 20X5 to 20X8. including the conversion.
Question 16.9
Blunder Limiteds accountant quit in November 20X5 just before the year ended. They have
employed a new, but inexperienced accountant, who is unsure how to treat the following
share issues:
Blunder Limited issued 500 000 10% compulsory redeemable preference shares. They
were issued at par (C4) and are redeemable at par on the 31 December 20X8. The market
interest rate is 10% for similar preference shares.
On 1 January 20X5 Blunder Limited issued 400 000 2 (12%) compulsory convertible
preference shares at par. They are convertible on the 31 December 20X9 into ordinary
shares. The market interest rate for similar shares is 15%.
The accountant has processed the following journals:

Debit
Bank
Credit
2 000 000
2 000 000
Preference shares: Equity

Issue of redeemable preference shares
Debit
800 000
Bank
Credit
800 000
Preference shares: Equity

Issue of convertible preference shares
Required:
Discuss whether or not the above journals are correct and if not provide the correcting journal
entries.
Chapter 16
199
|
Question 16.10
Happiness Limited purchased the following on 1 January 20X5:
100 options to buy Smiley Limited shares on 25 November 20X6 for C200 each. The
options were trading at C300 each at 31 December 20X5. Happiness Limited on the
purchase of these options designated them to be fair value through profit or loss.
200 Grin Limited shares for Cl50. These were classed as available for sale. The fair
value of these shares was C200 at 31 December 20X5.
300 compulsory redeemable preference shares (10%) in Giggle Limited. They cost CIO
and are redeemable on 31 December 20X8 at C14. Happiness Limited did not designate
these as fair value through profit or loss. The effective interest rate of these preference
shares was calculated to be 17.70%.
Required:
Calculate the carrying amount of each of the above financial instruments and provide all the
necessary journal entries for the year ended 31 December 20X5.
Question 16.11
Sneedon Limited issued 10 000 C2 @ 10% cumulative preference shares on the 1 January
20X6 at a 10% discount off the face value. The shares are convertible, at the option of the
shareholders, into ordinary shares at a rate of 10 preference shares for 1 ordinary share.
Should the preference shareholders not elect to convert their shares into ordinary shares, the
preference shares will be redeemed at a premium of Cl per share on the 31 December 20X9.
Sneedon Limited classified the C18 000 preference shares as equity and presented preference
dividends of C2 000 in the statement of changes in equity. Share issue expenses of Cl 000
were incurred by Sneedon Limited and were reflected as an expense in the statement of
comprehensive income.
Required:
Critically analyze the acceptability of the above accounting treatments for the year ended
3 1 December 20X6 and provide the correct treatment if necessary.
Question 16.12
On the 1 January 20X6 Mich Limited issued 1000 000 CIO par value fixed rate 10%
compulsory redeemable preference shares at par value. The preference shares are compulsory
redeemable at C15 each on the 31 December 20X10. Preference dividends are paid annually
in arrears on the 31 December.
The ex-dividend market value of the preference shares was as follows:

Market price (C)
Date
31 December 20X6
31 December 20X7
3 1 December 20X8
31 December 20X9
31 December 20X10
Chapter 16
11
12
9
14
15
200
The effective interest rate is 17.11239%.
Kim Limited purchased all 1 000 000 preference shares on 1 January 20X6.
Required:
a) Discuss the possible methods that Kim Limited could apply in accounting for its financial
asset (i.e. its investment in Mich Limiteds preference shares).
b) Given the above ex-dividend market values of Mich Limiteds preference shares, prepare
the journal entries in Kim Limiteds general journal assuming that Kim Limited considers
its investment to be:
i)
designated as fair value through profit or loss;
ii)
held to maturity;
iii) available for sale.

c) Assuming that Kim Limited earned other profit in each year (i.e. before considering any
income related to the financial instruments) of Cl 000 and assuming that Kim Limited
designated the investment in the Mich Limited preference shares as available for sale,
prepare the:
statement of comprehensive income; and

statement of changes in equity.
Ignore tax.
d) Repeat part (c) assuming that the tax rate is 30%.
Question 16.13
On 1 January 20X9, Marshall Ltd bought a 10 000 debenture at a discount of 5%. It has a
coupon rate of 7% p.a. and matures in 10 years at face value. It was designated as available
for sale.
Interest is payable annually in arrears and the effective interest rate is 7.736% p.a.
On 3 1 December 20X9 (year end), the fair value of the debenture was 10 500.
Exchange rates on various dates were as follows:
Date
1/1/X9
31/12/X9
Average X9
1: C
12.IQ
11.70
11.90
Required:
a) Briefly describe the correct accounting treatment of the debenture in respect of interest,
exchange differences, and fair value adjustments.

b) Prepare all necessary journals for 20X9. Ignore tax,
Narrations are not required.

oni
I
I
Question 16.14
Bering Ltd entered into the following transactions during the year ended 3 1 December 20X9:
a) On 1 March 20X9, the company purchased debentures at a discount of 2% off the face
value of C100 000. A coupon rate of 11% p.a. is payable biannually in arrears on 30
August and 28 February every year. The debentures will be redeemed in 5 years at a
premium of 5%. The entity has the intent and ability to hold the debentures to maturity.
(Effective interest rate = 12.3% p.a.)

b) On 30 June 20X9, the company purchased 100 shares in Midway Ltd at C23 per share,
with the intention of long term investment. Transaction costs of C800 were incurred. By
year end, the shares were trading at C25 per share. They were not designated at fair value
through profit/loss.
c) Also on 30 June 20x9, the company issued 10% redeemable preference shares worth
C500 000, redeemable at the option of Bering Ltd. However, if the companys share price
falls lower than C14, the preference shares become redeemable immediately. Bering Ltds
share price has never fallen below Cl 6 since incorporation. A final preference dividend of
C25 000 was declared on 31 December 20X9.
d) Bering Ltd bought 10 mining share index futures on 1 November 20X9 with speculative
intentions. The futures allow the company to buy the shares at an index level of 2500 on
28 February 20Y0. Profits/losses are directly transferred to the companys bank account.
A C40 000 margin deposit was made. The index level was 2500 on 1 November 20X9,
and had increased to 2700 by year end. (Note: Futures are traded in multiples of 10).
e) On 1 December 20X9, the company bought ten SAFEX call options with a short term
intention to sell. This allows the company to purchase the index at 9 000 points on
31 December 20X9. The margin deposit paid was C15 000 and the option was exercised
on maturity. The index level was 9 100 on exercise date
Required:
Prepare all necessary journal entries to record the above transactions in the books of Bering
Ltd for the 31 December 20X9 financial year. Ignore tax. Narrations are not required.
Question 16.15
Bounty Ltd (year end 3 1 December) has entered into the following transactions:
On 1 April 20X8, the company bought 300 shares in a local unlisted company for C6 000.
Transaction costs of C600 were incurred. Bounty Ltd had no plans to sell the asset in the
immediate future and thus classified the investment as available for sale.
On 31 December 20X8 the fair value of the investment was C5 900. Exactly a year later,
the company sold half (150 shares) at fair value (C18 per share).
On 1 January 20X9, the company purchased government gilts (face value = C300 000) for
C270 000. Coupon interest is levied at 8% p.a., payable biannually. The gilts are
redeemable at face value in 3 years. The effective interest rate is 6,034% per 6 months or
12.07% p.a. The company had the positive intent and ability to hold to maturity.
On 30 June 20X9, the company sold 60% of the gilts at fair value of C170 000. A market
related interest rate on the date of sale was 10.6% p.a.
zm
f-
Required:
a) Prepare journal entries for the purchase and subsequent sale of the shares for the 20X8
and 20X9 financial years.

b) Prepare journal entries to record the government gilts in the accounting records for the
year ended 3 1 December 20X9.
Narrations are not required.
Chapter 16
203
[Part 4
Chapter 17
Question
17.1
17.2
17.3
17.4
17.5
17.6
17.7
17.8
17.9
17.10
17.11
17.12
17.13
Key issues
Pollution of environment, provision for rehabilitation costs
Guarantee for a loan
Accounting treatment of maintenance costs
Onerous contract
Provision for guarantees
Accounting treatment for the cost of repairing a tanker leaking oil and of
cleaning up the environment
Accounting treatment of a provision for audit fees
The recognition and measurement of a provision for restructuring
Provision for future major inspection
Provision for decommissioning costs, conceptual justification, journal entries,
disclosure
Provision for decommissioning costs:
Part A: journals and disclosure
Part B: journals and disclosure involving a change in estimate
Decommissioning costs
Provision for disposal of medical waste and legal claims
Chapter 17
205
Question 17.1
Toxins Waste Disposal Limited is a company that handles the collection and disposal of toxic
waste. The companys financial year ends on 31 December.
On 28 December 20X8 one of the companys tankers transporting a load of toxic waste turned
over during a storm and spilled its load. The waste seeped into the ground on the side of the
road polluting the area for several hundred meters. There was a public outcry by the local
residents and concerned environmentalists that the contamination would spread to a nearby
river, which was the source of the residents water supply.
Due to immense negative publicity, Toxins Waste Disposal Limiteds directors published a
statement in the newspaper on 30 December 20X8 that the company would remove the
contaminated soil and replace it with new soil by 15 February 20X9. On 31 December 20X8
the directors wish to create a provision for the rehabilitation costs but are unable to estimate
what the rehabilitation of the contaminated area will cost. This is the first time that this
particular chemical has been spilt and a detailed investigation will need to be carried out to
determine the extent of the damage that has occurred. The investigation is to be carried out
during early February 20X9. The publication date of the financial statements is
3 1 January 20X9.
Required:
Discuss how the directors of Toxins Waste Disposal Limited should account for and disclose
the above situation in the financial statements for the year ended 31 December 20X8 in
accordance with The Framework and IAS 37.
Question 17.2
Beta Limited has signed a guarantee for a loan owed by one of the directors of the company,
to Standard Bank amounting to C250 000. The managing director, Mr. Beta is unsure of how
to treat this guarantee. The company will only be liable for the loan if the director fails to
make the payments as they fall due.
Required:
Discuss, in terms of International Financial Reporting Standards, how the guarantee of the
directors loan should be treated and disclosed in the financial statements of Beta Limited.
Question 17.3
The accountant of Zimbali Limited is aware that roughly Cl 000 000 will be paid in the 20X2
financial year in respect of maintenance costs. This expected expenditure is in accordance
with the company policy of performing maintenance on the factory plant once every three
years. The accountant wishes to provide for one third of this expected cost in the current year
ended 3 1 December 20X0.
Required:
Critically analyse the above issue, explaining whether the treatment is correct or incorrect and
justifying your advice with references to International Financial Reporting Standards.
Chapter 17
206
Question 17.4
Unsure Limited entered into a contract to supply bricks to a new, foreign customer on
1 February 20X8. The order is for the supply of 10 million bricks per month from
1 June 20X8 to 31 March 20X9, a total of 100 million bricks. A special order was placed for
these bricks as they are not standard bricks, but are to be used in the construction of a garden
cottage for the Princess of Lalaland.
On 1 February 20X8, Unsure Ltd estimated that the contract would cost CIO million.
Penalties for late delivery amount to C500 000 and penalties to cancel the contract amount to
C2 000 000, payable immediately on late delivery or cancellation. Contract revenue is
Cl 500 000 per month.
Between February and June 20X8, prices of supplies increased by more than expected, and
the cost of producing the first batch was C800 000. Prices continued to rise, and by
31 December 20X8, C12 000 000 had already been spent on the contract, and it was budgeted
that C8 000 000 would need to be spent to complete it. Unsure Ltd is considering cancelling
the contract, although they do not know how they will find C2 000 000 to pay the penalty for
cancelling.
Required:
Discuss how this matter should be recognized and measured in the financial statements of
Unsure Ltd for the year ended 31 December 20X8.
Question 17.5
Rich Kid Ltd sells various cheap, but expensive-looking electronic items. All goods are sold
with a six-month guarantee, provided by Rich Kid Ltd. Rich Kid Ltds suppliers are MoneyCruncher Ltd and Super-Duper Ltd. Super-Duper Ltd also offers a 6-month guarantee on all
goods sold to Rich Kid Ltd, thus any returns by customers to Rich Kid Ltd will be passed on
to Super-duper Ltd for fulfillment. Money-Cruncher offers no such refund policy, although it
has occasionally refunded customers for returned goods.
Details of sales of the three companies for the year ended 31 December 20X8 follow. All
sales are incurred evenly over the year.
Rich Kid Ltd: C500 000

Money-Cruncher Ltd: C5 000 000
Super-Duper Ltd: C7 000 000
Estimates of returns to the three companies
Rich Kid Ltd

Money-Cruncher Ltd
Super-Duper Ltd
Most likely
15%
5%
10%
Worst ever
30%
15%
18%
Best ever
10%
1%
8%
Super-Duper Ltd thinks that sales in the last half of 20X8 were lower than usual, and that
returns by customers will be low.
Required:
Discuss the recognition and measurement of the above transactions in the accounting records
of each company at 3 1 December 20X8.
Chapter 17
207
Question 17.6
BatterSea Shipping Limited is a South African shipping company that transports crude oil
from Saudi Arabia to South Africa. On 28 September 20X9 one of the companys oil tankers
was damaged in a violent storm off St Lucia on the KwaZulu Natal coastline (South Africa)
and started leaking oil.
Management contracted a specialist repair contractor to repair the damage temporarily at sea,
in order to prevent the oil from leaking further. The necessary repairs were carried out on
29 September 20X9 at a cost of C365 000, which was invoiced immediately.
The tanker was then sailed to Durban harbour, South Africa, where the cost of repairing it was
assessed to be C2 750 000. Management entered into a contract on 12 October 20X9 to repair
the ship at the harbour dry dock. The cost of the repairs would be financed by a loan from the
bank at prime +1%.
The oil spill affected a 15 kilometre stretch of coastline and by 29 September 20X9 there had
been a huge outcry from the general public, as well as environmentalists who were concerned
about the damage to an area of such environmental significance. In light of this, the
managing director made a public announcement on 30 September 20X9, on television and in
the newspapers, of the companys intention to clean up the entire area affected by the spill.
Clean up of the environment would only commence once an expert team of environmentalists
had assessed the extent of the damage and the most effective method of removing the spilt oil.
On 20 October 20X9 management engaged a team to perform this assessment. The
assessment will be available before 31 October 20X9.
The companys financial year end is 30 September and the financial statements are scheduled
to be approved on 15 November 20X9.
Required:
Discuss how the directors of BatterSea Shipping Limited should account for and disclose:
a) the repairs at sea
b) the repairs at the dry dock, and
c) the cost of cleaning up the environment
in the financial statements for the year ended 30 September 20X9 in accordance with the
Framework and IAS 37. A discussion of an expense is not required.
Question 17.7
You are the partner in charge of the audit of Granchester Limited., a company listed on the
Johannesburg Securities Exchange. The financial year-end of the company is
30 September 20X1 and the directors wish to approve the financial statements for issue on
15 November 20X1.
In finalising the financial statements, the directors wish to create an accrual for audit fees of
Cl 200 000, of which C900 000 relates to audit work completed at 30 September 20X 1 and
the C300 000 relates to work done between 1 October 20X1 and 31 October 20X1. All the
fees relate to the financial year ended 30 September 20X1.
Chapter 17
208
Required:
Discuss, giving reasons, whether or not you agree with the directors treatment of the
provision for audit fees.
Question 17.8
Yolande Limited is a company that manufactures vehicles for export to Dubai. All parts used
in the manufacture thereof are currently manufactured by Yolande Limited. It has recently
been discovered, however, that the tyres currently manufactured by a branch of Yolande
Limited (situated in Eshowe), cost far more than imported tyres from Ho Sin Limited
(situated in Japan). The financial year-end of Yolande Limited is 30 June.
As a result, management has devised a detailed formal plan to close down the Eshowe tyre
manufacturing branch of Yolande Limited and thereafter to import tyres instead. This plan
was agreed to by every director before 30 June 20X3 and is to be implemented in
December 20X4. There are approximately 50 factory and administrative staff at the Eshowe
branch who will either be retrenched or retrained and relocated. All costs related to the
discontinuance of this branch, having been thoroughly investigated by the companys
financial team, are expected to be as follows:
Annual gains expected from the cost savings in purchasing tyres from Ho Sin Limited in
Japan rather than the more expensive tyres from the Eshowe branch: C400 000
Retrenchment packages: Cl 500 000;
Cost of retraining those employees who will remain employed by and relocated within
Yolande Ltd: C500 000.
The directors of Yolande Limited are concerned that, since the closing down of the Eshowe
branch is to only take place in December 20X4, staff members who might hear about the plan
may resign well before this time. For this reason, the directors have agreed not to announce
the plan until 30 September 20X4.
The amounts are material but the plan above has not caused a going concern problem.
Required:
a) State:
the definition of a liability; and

the
recognition criteria
as provided in The Framework.
b) State:
the recognition criteria specific to a provision for restructuring costs, and
the definition of restructuring,
as set out in IAS 37
c) Discuss, with reference to the abovementioned definitions and recognition criteria,

whether a provision for restructuring costs should be recognised in the financial
statements at 30 June 20X3.
d) Assuming that a provision for restructuring costs is to be recognised, calculate the amount
of the provision to be raised in Yolande Ltds balance sheet as at 30 June 20X3. Briefly
justify your answer.
Chapter 17
209
is
I
,
Question 17.9
Flybynight Limited is a delivery company that delivers packages between Durban and
Johannesburg on an overnight basis. During the past few years, the trucks have suffered a
number of mechanical failures and an increasing number of accidents. In order to reduce the
cost of travelling by road, the company purchased an aeroplane at a cost of C4 500 000. As a
condition to its continued use, the aeroplane requires a major inspection every 10 000 flying
hours. The aeroplane had flown 4 000 hours since its last major inspection on the date of
purchase and has flown 273 hours since the date of purchase.
Flybynight Limited has estimated that the next major inspection is expected to cost C500 000
(based on the aeroplanes previous major inspection, which cost the seller C420 000).
The following entry has been processed:
Major inspection (Asset)

Provision for major inspection (Liability)
Debit
500 000
Credit
500 000
Required:
Analyze and discuss the accounting treatment of the major inspection. Your analysis should
include a discussion of a liability, a provision and an asset.
Question 17.10
Leo Limited leases an industrial site close to a game reserve. The company recently obtained
approval for heavy plant and machinery to operate on the site for a period of five years. The
approval is in terms of a licence granted by the government. The Minister of Environmental
Affairs approved the licence because the main activity of Leo Limited is the production of
environmental friendly paper from recycled material.
The plant and machinery was purchased on 1 October 20X2 for Cl 000 000. Installation
of C175 480 were incurred and paid over the months of October, November and
December of 20X2. The plant and machinery was in a condition necessary for it to be
capable of operating in the manner intended by management on 1 January 20X3.
costs
The plant and machinery has an estimated useful life of five years with no residual value. In
terms of the licence, Leo Limited is obliged to dismantle the plant and machinery and restore
the area at the end of its useful life. Future decommissioning costs are expected to be
C120000. The company uses a discount rate of 10% to calculate the present value of the
decommissioning costs.
Chapter 17
210
The financial accountant prepared the foliowing schedule reflecting the unwinding of the
discounted decommissioning costs:
Date
01/01/X3
31/12/X3
31/12/X4
31/12/X5
31/12/X6
31/12/X7
Years to
decommissioning date
5
10% discount factor

0.621
4
3
2
1
0
0.683
0.751
0.826
0.909
1.000
PY
74 520
81960
90120
99 120
109 080
120 000
Required:
a) Discuss the appropriate accounting treatment for the future decommissioning costs. Your
answer should refer to the accounting framework and to the relevant accounting
standards.
b) Prepare all the journal entries relating to the above transactions that would have been
processed in the accounting records of Leo Limited for the year ended
31 December 20X3.
c) Prepare the relevant extracts from the income statement of Leo Limited for the year ended
31 December 20X4 and from the balance sheet at 31 December 20X4. Notes to the
financial statements (including accounting policies) are required in respect of provisions
only.
Question 17.11
Menace Limited purchased a nuclear plant, the details of which are as follows:
Cash purchase price (1 January 20X1):
Depreciation straight-line to nil residual values:
C2 000 000
10 years
The nuclear plant must be dismantled after 10 years, details of which are as follows:
Future decommissioning cost assessed on 1 January 20X1:

Discount rate:
C3 000 000
10%
Required:
a) Given the information provided above:
i)
Show all journal entries for the years from 20X1 to 20X10.
ii) Disclose the provision for future decommissioning costs note in Menace Limiteds
financial statements for all years affected in accordance with International Financial
Duster 17
211
b) Assuming that during 20X4 it was established that the expected cost of decommissioning
has increased to 3 800 000:

i)
Show the journal entries from 20X1 to 20X10 inclusive.
ii) Disclose the provision for future decommissioning costs note in accordance with
International Financial Reporting Standards for years 20X1 to 20X10 inclusive.
iii) Disclose the separately disclosable items: finance charges and depreciation as well as
the change in estimate note in Menace Limiteds financial statements, for years 20X1
to 20X4 inclusive, in accordance
with International Financial Reporting Standards.
Question 17.12
Transkei Trading purchased a paper mill for Cl 000 000. Future expected decommissioning
of Cl 800 000, discounted using a discount rate of 10% to the present value of
C694 800, are recognised on the same date.
costs
On 31 December 20X1, the value in use was C800 000 and the expected selling price was
Cl 200 000 (both Figures exclude the decommissioning liability). Depreciation is to be
provided on the straight-line method over the expected useful life of the paper mill of 10
years. The current Financial year end is 31 December 20X1.
Required:
a)
Assuming that the paper mill is purchased on 31 December 20X1:

i)
Journalise the acquisition of the asset.
ii) Show the calculation of the impairment loss assuming that Transkei Trading will pay
the decommissioning costs.
iii) Show the calculation of the impairment loss assuming that the hope is that a future
buyer will pay the decommissioning costs.
b) Assuming that the paper mill is purchased on 1 January 20X1:

;
i)
Journalise the acquisition of the asset, the depreciation of the asset, the unwinding of
the discount and the impairment loss, if any.
ii) Show the calculation of the impairment loss assuming that Transkei Trading will pay
the decommissioning costs.

iii) Show the calculation of the impairment loss assuming that the hope is that a future
buyer will pay the decommissioning costs.
Question 17.13
Parklands Hospitals Limited is a private hospital group operating Five hospitals in Karachi.
The following information relates to the year ended 3 1 December 20X6.
Medical waste:
In terms of environmental legislation the company is required to dispose of all medical

waste generated by the hospitals in a socially responsible manner, within two weeks of
Chapter 17
212
generation, failing which penalties may be levied. The company has the necessary permit
to dispose of medical waste by incineration on the site of their hospital in Karachi.
In terms of their permit the company is allowed to dispose of 120 tons of medical waste
per annum from 1 January to 31 December. The hospitals generate an average of 10 tons
of medical waste per month evenly. On 25 November 20X6 the furnace used to incinerate
medical waste malfunctioned and could not be repaired. A replacement furnace was
commissioned immediately but will only be completed and installed on 31 January 20X7
at a cost of Ri 500 000. A deposit of R500 000 was paid on 15 December 20X6.
Due
the malfunction of the furnace the company has 12 tons of un-disposed medical
waste on hand at 31 December 20X6. Management has obtained a quote from Waste
Incinerators to dispose of the waste on hand during January 20X7 at an estimated cost of
R10 000 per ton.
to
On 25 January 20X7 the company received notification from the Environmental Agency
that a penalty amounting to R125 000 would be levied as a result of not disposing of
waste within the prescribed period at 31 December 20X6. Management has decided not
to raise an objection to this penalty.
Legal claim:
On 15 October 20X6, a visitor, Mr Downe, the Chief Executive Officer of a large

company, slipped on a wet floor in the hospital foyer while on his way to visit his ill
mother. As a result of his fall he sustained multiple fractures to his left leg and right arm
and was immobilized for 4 months. On 1 December 20X6 Mr Downe filed a lawsuit
against the hospital for negligence, claiming damages for the injuries sustained and loss of
income suffered as a result of his fall.
At the 31 December 20X6 the companys attorneys have reported that it is highly
probable that Mr Downe s claim will be successful against the company. However they
are uncertain how much would be awarded in damages as past rulings of this nature have
been inconsistent. The directors have applied their minds to the amount of damages likely
to be awarded and have decided that there is not enough information at the present to
make a reasonable estimate. The attorneys will gain a better understanding of the possible
amount of damages after the first court proceedings to be held on 1 March 20X7.
The financial statements were approved for issue on 15 February 20X7.
Profit for the period has been correctly calculated as R2 858 500 (20X5: R2 212 000) after
taking the above information into account.
Required:
a) Discuss how the cost of the un-disposed medical waste on hand at 3 1 December 20X6
and the penalty should be recognised and measured in the financial statements of
Parklands Hospitals Limited for the year ended 3 1 December 20X6 in accordance with
b) Discuss how the legal claim should be recognised, measured and disclosed in the
financial statements of Parklands Hospitals Limited for the year ended 31 December
20X6 in accordance with International Financial Reporting Standards.
Chanter 17
213
Gripping IFRS : Graded Question
Chapter 17
214
|Part4|
Chapter 18
Question
18.1
18.2
18.3
18.4
18.5
18.6
18.7
18.8
Key issues
Alleged litigation before reporting date
Liquidation of a customer
Inventory write down, liquidation of a customer, date of authorisation
Understanding the effect of specific events: identification, discussion and
journal entries
Reporting of a guarantee in the financial statements
Change in market value of investments
Insolvency of a customer, legal action against entity, obsolete inventory,
Litigation: provisions, contingencies and post reporting period events
Chapter 18
'215
Question 18.1
Bigmouth Limited, a manufacturer of toothpaste, was taken to court over alleged defamation
charges when Bigmouth Limited accused a rival toothpaste manufacturer of industrial
espionage. Before the year end of 31 December 20X3, the lawyers of Bigmouth Limited
advised that, although losing the case was unlikely, legal fees and settlement costs could
amount to C800 000 in the event that the court case was lost.
On 4 February 20X4, the judge presiding over the case ruled that Bigmouth should pay
C900 000 to the plaintiff as well as pay all of the plaintiffs legal fees, which amounted to
C150 000.
The financial statements had not yet been authorised for issue at the time of the court ruling.
Required:
Discuss how this information should be treated in the financial statements of Bigmouth
Limited for the year ended 31 December 20X3.
Question 18.2
Penguin Foods Limited received a letter from Total Liquidators on 15 January 20X1, stating
that Salmon Fish Shop had been placed into liquidation owing to trading difficulties and that
all creditors could expect to receive a liquidation dividend of no more than CO.15 in Cl.
Salmon Fish Shop owed Penguin Foods Limited Cl36 000 at 31 December 20X0.
The financial statements for the year ended 31 December 20X0 were approved on
15 March 20X1.
Required:
a) Identify, giving reasons, what type of event this information would be classified as in
terms of IAS 10.
b) Disclose all the effects of the above information in the annual financial statements of
Penguin Foods Limited as at 31 December 20X0 in accordance with IAS 10.
Question 18.3
Melrose Limited is a company that manufactures and distributes computerised electronic
products. The head office is situated at The Melrose Arch with retail outlets and warehouses
in different parts of the country. The financial year end of the company is 30 June.
The management of the company completed the draft financial statements for the year ending
30 June 20X5 on 31 August 20X5. On 18 September 20X5, the board of directors reviewed
the financial statements and authorised them for issue. A profit announcement appeared in
the press on 19 September 20X5. The financial statements are made available to shareholders
on 1 October 20X5 and are approved by shareholders at the annual meeting on
5 November 20X5.
The following events occurred after the end of the reporting period:
a) A major competitor announced a reduction in the price of its MP3 players during
July 20X5. The competitor was able to do this because of its ongoing investment in new
Chapter 18
216
technology. Management of Melrose Limited had included the inventory of MP3 players
on the draft statement of financial position at its cost of C6 500 000. It is estimated that
the net realisable value of this inventory at 30 June 20X5 is C5 000 000 because of the
competitors price reduction.

b) One of Melrose Limiteds warehouses is situated on the Kwa-Zulu Natal north coast. A
tropical storm struck the area during late August 20X5 and flooded the warehouse,
destroying the entire inventory on the ground floor, comprising modems and lightning
protector kits. This inventory was included on the draft statement of financial position at
30 June 20X5 at a cost of C3 000 000.
c) A customer of Melrose Limited was placed into liquidation at the end of July 20X5. The
amount of C400 000 owing by this customer was included in accounts receivable on the
draft statement of financial position at 30 June 20X5.

d) Another customer of Melrose Limited, whose retail outlet was situated on the Kwa-Zulu
Natal north coast, announced early in September 20X5 that it was closing down after its
premises and all the fixtures and fittings as well as its inventory were destroyed as a result
of the August tropical storm. The company was under-insured and was forced to close
down. Management of Melrose Limited estimates that it is unlikely that more than C0.30
in the Cl will be paid on liquidation. An amount of C150 000 owing from this customer
was included in accounts receivable on the draft statement of financial position at
30 June 20X5.
e) Melrose Limited proposed a bonus scheme for all employees amounting to C200 000.
This scheme was approved by the board of directors and communicated to the employees
on 19 September 20X5.
Required:
Discuss, with reasons, the nature of each event described above in terms of IAS 10 as well as
the appropriate accounting treatment (include any necessary journal entries) and / or
disclosure in the financial statements of Melrose Limited for the year ended 30 June 20X5.
Question 18.4
Toddy Limiteds financial statements for the year ended 31 December 20X3 have not yet
been authorised for issue. The directors are expecting to authorise the release of these
financial statements on 5 May 20X4. The following issues, which have not yet been
considered, require your attention:
Vandalism during December 20X3 resulted in the complete destruction of a neighbouring
companys warehouse, leading to that company filing for insolvency in January 20X4.
This neighbouring company was, unfortunately, one of Toddy Limiteds debtors, owing
Toddy Limited C100 000 at 31 December 20X3. The liquidators announced in January
20X4 that CO.20 per Cl would be paid upon liquidation. The full balance owing by this
debtor is included in the statement of financial position as at 31 December 20X3.
Toddy Limited owns 100 000 shares in a listed company. At 31 December 20X3 the
market price of each of these shares was C5. During March 20X4, war broke out and
resulted in the share price dropping dramatically to C2 per share. The investment in shares
as at 31 December 20X3 has not been adjusted for the drop in share price.
Toddy Limited will be issuing 500 000 Cl par value shares on 10 May 20X4.
riianfpr 18
217
All amounts are material but none of the issues mentioned above have caused there to be a
going concern problem.
Required:
With reference to the treatment of each of the three issues in the financial statements of
Toddy Limited for the year ended 31 December 20X3:
i) Briefly explain the reasoning for your answer to part (i) above.
ii) Provide the required adjusting journal entries, where appropriate, or state whether or not
any related information would need to be disclosed in the abovementioned financial
statements.
Set your answer out under the following headings:

a) Insolvent debtor
b) Drop in value of investment in shares

c) Issue of shares
Ignore taxation.
Question 18.5
Simpson Limited is a family owned company that sells designer shorts and skateboards. The
year end of the company is 30 June. Draft financial statements for the year ended
30 June 20X3 were prepared at 30 June 20X3 based on information available at that date. The
directors are currently in the process of reviewing all available information prior to publishing
the financial statements on 30 September 20X3.
At the beginning of August 20X2, Simpson Limited signed a guarantee amounting to
Cl 000 000 for the borrowings of a major supplier, Smithers Limited, whose financial
condition at that time was sound. At 30 June 20X3, the directors of Simpson Limited still
believed the financial condition of Smithers Limited to be sound. However, it has since come
to light that the financial condition of Smithers Limited has been deteriorating since early
20X3 and at 30 August 20X3 it filed for protection from its creditors.
Required:
a) Discuss, with reasons, how the guarantee would have been reported in the draft financial
statements of Simpson Limited for the year ended 30 June 20X3.
b) Discuss, with reasons, how the guarantee should be reported in the published financial
statements of Simpson Limited for the year ended 30 June 20X3.
Question 18.6
Core Limited is a small company that designs customised software solutions for clients. The
year end of the company is 30 June. Draft financial statements for the year ended
30 June 20X3 were prepared at 30 June 20X3 based on information available at that date. The
directors are currently in the process of reviewing all available information prior to publishing
the financial statements on 30 September 20X3.
Chapter 18
218
Core Limited has a portfolio of investments where it invests excess cash on the stock
exchange. At 30 June 20X3, the cost of the investments was C650 000 and the market value
amounted to C725 000. During August 20X3, however, market conditions worsened and the
market value dropped to C625 000 when the published financial statements were being
finalised for publication.
Required:
Discuss, with reasons, how this matter should be reported in the published financial
statements of Core Limited for the year ended 30 June 20X3.
Question 18.7
Blossom Limited is a large distributer of fresh flowers. The company has large contracts to
supply florists and corporate event co-ordinators throughout the country. The financial
director and his staff are in the process of preparing the financial statements for the year
The following events took place between the reporting period date and the date of
authorisation of issue of the financial statements:
a) It was discovered that a customer, Violet Florists, who owed C100 000 at year-end was
declared insolvent on 15 January 20X9 after its premises burnt down over the previous
weekend. The premises were completely destroyed and were not insured.
b) Legal action was brought against Blossom Limited for delivering old flowers to an event
co-ordinator who needed them for a government function that hosted foreign heads of
state on 23 December 20X8. The claim is for CIO 000. Blosssom Limiteds lawyers
believe it is highly likely that Blossom Ltd will have to pay CIO 000.
c) Flowers in stock often pass their sell-by date before they are sold and are left in the comer
of the store room. At the year-end stock count on 31 December, some old flowers were
inadvertently included in stock at their cost of C5 000. They will never be sold by
BlossomLimited.
d) There was a burglary at Blossom Limiteds premises on 2 January 20X9 and pesticide and
insecticide to the value of CIO 000 was stolen. Such items are included in consumable
stores.
The financial statements are authorised for issue on 20 January 20X9.
Required:
Prepare the journal entries that are necessary to correct the financial statements of Blossom
Limited to ensure compliance with International Financial Reporting Standards. Provide
reasons as to why a journal entry is / is not prepared.
Question 18.8
Lemon Limited is a company that produces jam and tinned fruit. It has a 31 December year
end.
Lemon Limited purchased 200 tons of long-life limes on 2 December 20X2 for C500 000,
half of which had been used in the production of marmalade by year-end. All the marmalade
produced from this delivery of long-life limes had been sold to Pack-a-Sack Limited
219
(a popular nation-wide grocery chain) by year-end. On 10 December 20X2, a customer of

Pack-a-Sack Limited suffered serious food poisoning and alleged that it was caused by a
bottle of marmalade purchased from Pack-a-Sack Limited. This customer proceeded to take
Lemon Limited to court over the poisoning. Lemon Limited is not insured against the
potential losses that may result from the court case.
Due to public interest on a national level, the case went to court almost immediately.
Indications during the court proceedings held in late December 20X2 were that Lemon
Limited was probably responsible for the poisoning and would probably be found guilty: it
was found that the marmalade was poisoned because the long-life limes used in its
manufacture were transported by the supplier together with a load of insecticide, which had
contaminated the limes. It was impossible, however, to reliably estimate the settlement costs
at year-end. Due to the negative publicity arising from the court case, Lemon Limited has
decided not to plead against the inevitable guilty verdict and to willingly pay all costs, in the
interests of salvaging a positive public image.
Estimated costs: During January 20X3, Lemon Limiteds lawyers estimated that the
court would award the plaintiff C2 500 000 whereas an out-of-court settlement would
probably be C2 200 000.
Findings
of the specialists: Specialists hired by Lemon Limited in January 20X3

confirmed that 20% of the balance of the long-life limes in stock at year-end are also
contaminated and must be destroyed.
Warnings by lawyers: Lemon Limited has been unable to keep the case out of the media
and their lawyers warned in December 20X2 that as soon as the verdict was published in
the media, more, similar cases will probably be brought against Lemon Limited by other
aggrieved customers, although it was impossible to estimate the number of cases or their
financial impact.
Returns: Pack-a-Sack Limited had sold all of the bottles of marmalade by 31 December
20X2. By the time the financial statements were authorized for issue on 15 February
20X3, no bottles of marmalade had been returned. It seems that there is only a remote
chance that there would be any returns at this late stage.
All amounts are material but none of the issues mentioned above have caused there to be a
going concern problem.
Required:
Discuss, with reference to IAS 10, how - if at all - the events should be recognised and
measured in the financial statements of Lemon Limited for the year ended 31 December 20X2
in order to comply with InternationalFinancial Reporting Standards.
You should use the following headings in your discussion:
Estimated costs
Findings by specialists
The warning
Possible returns
Chapter 18
220
/
/
/
Leases
(Part 4
Chapter 19
Leases
Question
Section A
19.1
19.2
19.3
19.4
19.5
19.6
19.7
19.8
19.9
19.10
19.11
19.12
Section B
19.13
19.14
19.15
19.16
Section C
19.17
Key issues
Leases in general and Lessees

Lease classification: theory
Lease classification: theory comparing the Framework to IAS 17
Lessee: Operating lease: journals
Lease classification: theory and journals
Lessee: Operating lease: journals and disclosure
Lessee: Operating leases with subleasing, VAT and normal tax: disclosure
Lessee: Finance lease: journals and disclosure
Lessee: Finance lease and normal tax: journals and disclosure:
A: ignoring VAT
B: with VAT
Lessee: Sale and operating leaseback: journals
a) SP greater than market related and rentals greater than market-related
b) SP less than market related but rentals not less than market related
Lessee: Sale and operating leaseback: journals
a) SP greater than market related and rentals greater than market-related
b) SP greater than market related and rentals equal to market-related
c) SP less than market related and rentals less than market related
d) SP less than market related but rentals not less than market related
Lessee: Sale and finance leaseback:
a) SP and rentals are market related
b) SP and rentals are below market related
Lessee: Sale and finance leaseback: journals and disclosure
Lessors
Lessor: Operating lease: journals

Lessor: Finance lease: journals and statement of financial position disclosure
Lessor: Finance lease: journals (instalments in advance)
Lessor: Finance lease: journals (instalments in arrears with initial costs)
Lessors and lessees

Multiple leases: disclosure (involves VAT and shows the defetred tax effect)
Chapter 19
221
Il
Leases
Question 19.1
As part of a major expansion plan, North Limited entered into an agreement
building from South Limited. The agreement is as follows:
Lease term
Inception date
Payment
o Years 1 to 5
o Years 6 to 8
Market value at inception
Useful life
to
lease a
:
S years
1/1/20X0
C5 000 per month

C2 000 per month
Cl 000 000
20 years
Required:
Justify how North Limited should classify the above lease agreement in terms of IAS 17.
Question 19.2
Citizen Limited entered into an agreement with Bigbrother Limited on 1 January 20X7, the
terms of which are as follows:
!
(
Citizen Limited will lease equipment from Bigbrother Limited;
The lease will be for 3 years;
The lease may not be cancelled;
There will be 3 lease instalments of C500 000 each, payable annually in advance (starting
on 1 January 20X7);
The equipment will be returned to Bigbrother Limited at the end of the lease.
At the time of the signing of the agreement, the useful life of the equipment was estimated to
be 10 years, at which point it is estimated that it will be worthless.
The cash cost of this equipment is C5 000 000.
Required:
a) Discuss how Citizen Limited should account for the lease in its financial statements for
the year ended 31 December 20X7, using the asset and liability definitions in the
Framework as your guide.
b) Discuss how Citizen Limited should account for the lease in its financial statements for
the year ended 31 December 20X7, using IAS 17 as your guide.
Question 19.3
The company at which you are employed as a financial manager entered into the following
operating lease agreement (as lessor) to lease an item of PPE:
Lease term is 3 years commencing 1 January 20X6
Chapter 19
222
1.
:
Leases
&
Lease payments:
31 December 20X6
31 December 20X7
31 December 20X8
Initial direct costs of lessor were C3 000 paid in cash.
54 720
67 260
29 640
Your company is a registered VAT vendor and has correctly classified the agreement as an
operating lease.
Required:
a) Calculate the rental income that will be recorded for each year.
b) Journalise all entries which involve the initial direct costs for the 20X7 financial year
ending 31 December.
i
Question 19.4
f:
Hello Limited leased office furniture from Goodbye Limited. According to the lease
agreement, ownership transfers from Goodbye Limited to Hello Limited at the end of the
lease term. The cash cost of the furniture is C497 370. The payment schedule is as follows:
7':
Date
1/1/20X2
31/12/20X2
31/12/20X3
31/12/20X4
Interest (10%)
Instalment
(200000)
(200 000)
(200 000)
(600 000)
49 737
34711
18 182
102 630
Liability
Capital repaid
Balance
150 263
165 289
181 818
497 370
497 370
347 107
181 818
Hello Limited depreciates office furniture over its estimated useful life of 3 years, using the
straight-line method, to a nil residual value.
Required:
a) Justify how Hello Limited should classify the above lease agreement.
b) Show the related journal entries for the year ended 3 1 December 20X2.
Ignore tax and journal narrations.
Question 19.5
Moon Limited is a lorry manufacturer. On 1 January 20X3, Moon Limited entered into an
operating lease (as a lessee) over a computer system Details of the annual lease rentals,
payable in arrears, are as follows:
20X3
20X4 to 20X6
20X7
20X8 to 20X10
0
C30 000 per annum
0
CIO 000 per annum
Chapter 19
223
Leases
Moon Limiteds profit before tax is C900 000 in 20X3 (after correctly accounting for the
lease).
The tax authorities grant a 20% capital allowance on owned assets but allow a deduction from
taxable profits of the lease payments if the asset is leased. The normal tax rate is 30%. There
are no other temporary differences other than those evident from the information provided.
Moon Limited satisfies the requirements to raise deferred tax assets.
Required:
a) Prepare the 20X3 journal entries with regard to the above lease agreement.
b) Draft the following to fully disclose the above lease and its tax effect:
Statement of comprehensive income for the year ended 31 December 20X3
Statement of financial position as at 31 December 20X3
Notes to the financial statement for the year ended 31 December 20X3
Note that the accounting policy note is required, whilst the deferred tax note is not required.
Question 19.6
On 2 July 20X4, Dux Limited entered into a 2-year operating lease (as lessee) over an item of
plant, which it then leased (under a 2-year operating lease) to Thick Limited (a sub-lessee).
The relevant details, from the perspective of Dux Limited, are as follows:
Lease rentals paid by Dux Limited
C50 000
C40 000
30 June 20X5:
30 June 20X6:
Lease rentals received by Dux Limited

30 June 20X5:
30 June 20X6:
C20 000
C30 000
i
The tax authorities grant a 20% capital allowance on owned assets but allow a deduction from
taxable profits of the lease payments if the asset is leased. The tax rate is 30%.
Required:
Prepare the profit before tax note for inclusion in Dux Limiteds financial statements for the
year-ended 30 June 20X5 in conformity with International Financial Reporting Standards.
Question 19.7
Tweet Limited is an airplane manufacturer, listed on the JSE Securities Exchange.
On 1 January 20X3, Tweet Limited entered into a finance lease (as a lessee) over a
vehicle with a cash cost of C700 000. Details of the lease agreement are as follows:
motor
Payments of C200 754 are made annually in advance;

Chapter 19
224
I
The lease term is 4 years; and
The interest rate implicit in the lease is 10%.
Leases
Tweet Limited depreciates the motor vehicle over 4 years, on the straight-line method, to a nil
residual value. Tweet Limiteds profit before tax is 900 000 in 20X3 (correctly calculated).
grant a 20% capital allowance on owned assets but
allow a deduction from taxable profits of the lease payments if the asset is leased.

provided. Tweet Limited satisfies the requirements to raise deferred tax assets.
Required:
b) Draft the following to fully disclose the above lease and its tax effects:
Statement of comprehensive income for the year ended 3 1 December 20X3

Statement of financial position as at 31 December 20X3
Notes to the financial statement for the year ended 3 1 December 20X3
Ignore VAT.
Question 19.8
On 2 April 20X2, Quack Limited entered into a lease agreement (as a lessee) over a delivery
van with a cash cost of C124 343. Details of the lease agreement are as follows:
The lease is for a three-year period;

Lease rentals of C50 000 are payable annually in arrears;
The first lease rental is due to be paid on 31 March 20X3;
The interest rate implicit is 10%; and
At the end of the three-year period, ownership of the van passes to Quack Limited.
Quack Limited has correctly classified this lease as a finance lease and depreciates the vehicle
over 3 years to a nil residual value using the straight-line method.
Quack Limiteds profit before tax for the year ended 31 March 20X3 is C300 000 (after
correctly accounting for the lease).

Chanter 19
225
Leases

The tax rate is 30%, and Quack Limited meets the criteria to raise deferred tax assets.
Required:
i)
Show the journals relating to this lease for the year ended 31 March 20X3. Tax journals
are not required.
ii) Disclose the following extracts of
Quack Limiteds financial statements in conformity

with International Financial Reporting Standards:
the statement of comprehensive income for the year ended 31 March 20X3
the statement of financial position as at 31 March 20X3
the notes to the financial statement for the year ended 31March 20X3, specifically:
Finance costs;
Taxation expense;
Property, plant and equipment; and
Interest-bearing non-current liabilities.
Ignore tax unless otherwise indicated.
Question 19.9
On 3 January 20X3, Star Limited entered into a sale and operating leaseback for a machine
that had a carrying amount of C800 000 (original cost is Cl 200 000).
The market prices in respect of a sale and leaseback arrangement are:
:
Fair selling price

Fair annual rental
Lease term
Ci 800 000
C200 000
4 years
Required:
Prepare the journal entries in the accounting records of Star Limited to account for the sale
and operating leaseback for the year-ended 31 December 20X3, assuming that the lease
agreement stipulates:
a) a selling price of C2 000 000 and annual rentals of C300 000.
b) a selling price of Cl 500 000 and annual rentals of C200 000.
Ignore all taxes.
Question 19.10
Baby Limited entered into a sale and operating leaseback arrangement with Mummy Limited
over Baby Limiteds plant. Baby Limited had originally purchased the plant for C500 000 on
1 January 20X4 and had depreciated it by C100 000 by 2 January 20X5, the date on which the
sale and operating leaseback agreement was signed.
Chapter 19
226
Leases
Fair market prices in respect of this sale and leaseback are as follows:
Fair selling price

Fair annual rental
C750 000
Cl50 000
Required:
Prepare the journal entries necessary to record the sale and leaseback in Baby Limiteds
accounting records for the year ended 31 December 20X5 assuming the lease agreement
stipulated a:
a) selling price of Cl 000 000 and an annual rental of C200 000 payable annually in arrears
for four years;

b) selling price of Cl 000 000 and an annual rental of C150 000 payable annually in arrears
for four years;
c)
selling price of C500 000 and an annual rental of C75 000 payable annually in arrears for
four years;
d) selling price of C500 000 and an annual rental of C 150 000 payable annually in arrears
for four years.
Ignore all taxes.
Question 19.11
Hundreds Limited entered, as a lessee, into a four-year sale and finance leaseback with
Millions Limited. The affected asset is a vehicle that had originally cost Hundreds Limited
C200000.
By 2 January 20X5, the date on which the lease agreement was signed, Hundreds Limited had
already depreciated this vehicle to a carrying amount of Cl00 000 but estimated the
remaining useful life of the vehicle to be four years with a nil residual value.
Fair market prices in respect of this sale and leaseback are as follows:
Fair selling price

Fair annual rental
C500 000
C75 000
The interest rate implicit in the lease agreement is 10%.
Required:
Prepare the journal entries to record the sale and leaseback of the vehicle in the accounting
records of Hundreds Limited for the year ended 31 December 20X5 assuming the lease
agreement stipulated a:
a) selling price of C500 000 and an annual rental of C75 000 payable in arrears for four
years plus a compulsory repurchase at the end of the period of C383 975;
b) selling price of C400 000 and an annual rental of C50 000 payable in arrears for four
years plus a compulsory repurchase at the end of the period of C353 590.
Ignore all taxes.
Chapter 19
227
Leases
Question 19.12
On 3 January 20X3, Woof Limited entered into a sale and finance leaseback (as lessee) over
one of its buildings for a four-year period. On this date, the building had
a carrying amount of C 1 000 000 (original cost is Cl 250 000);

a tax base Cl 000 000; and
a remaining useful life of 4 years.
The building was sold for Cl 200 000, and annual payments of C378 565 are required at the
end of each year. The interest rate implicit in the lease agreement is 10%.
Woof Limiteds profit before tax is C900 000 in 20X3 (correctly calculated).


provided. Woof Limited satisfies the requirements to raise deferred tax assets.
Required:
b) Disclose the above lease and its tax effect in the statement of comprehensive income for
the year ended 3 1 December 20X3, in the statement of financial position on this date, an
in the related notes, in accordance with International Financial Reporting Standards.

4
Ignore VAT.
Question 19.13
Sleepless Limited purchased a factory on 1 January 20X5 for Cl 500 000. This factory was
initially to be used as the premises from which Sleepless Limited would manufacture beds
and then wholesale them to retail stores.
However, as soon as they had acquired the building, Sleepless Limited entered into a contract
to supply the Royal Inn with new beds. The Royal Inn was replacing all their existing beds in
anticipation of the large number of visitors that would be staying at their establishment due to
the soccer world cup. This meant that the factory purchased did not have adequate space to
store the number of beds required to supply this customer.
As a result Sleepless Limited rented out the premises to a tenant with immediate effect. The
details of the lease agreement are as follows:
Start of lease
End of lease
Annual lease instalment
Lease payment
1 January 20X5
3 1 December 20X9
Cl00 000 (increased annually by 20%)
annually in arrears on the 31st of December each year
Chapter 19
228
m
:1
Leases
Sleepless Limited holds all investment property under the cost model and believes that the
total useful life of this building is 10 years and that it has a nil residual value. These estimates
remained unchanged.
Required:
Journalise the entries required in the books of Sleepless Limited to account for the
information above for the years ended 31 December 20X5, 20X6, 20X7, 20X8 and 20X9.
Ignore all taxes.
Question 19,14
Applebee Limited is a manufacturer of harvesting equipment. Applebee Limited sells the
equipment to farmers all around the country. Some customers purchase the equipment for
cash and others purchase under Applebee Limiteds finance lease arrangement.
Mr. Hatfield purchased a harvester from Applebee Limited and made use of their finance
lease agreement. The details of the lease are as follows:
The lease period is 5 years (signed on 1 January 20X5)

Lease instalments of C200 000 are payable annually in arrears on 31 December.
A fair market interest rate for this type of lease is 16.9911%.

The cost to Applebee Limited to manufacture this harvester was C500 000. Applebee Limited
implements a mark-up of cost plus 28% on their cash sales.
Required:
a) Journalise the entries required to account for the abovementioned transaction for each of
the years ended 31 December 20X5 to 20X9 in the books of Applebee Limited.
b) Disclose the statement of financial position and finance lease debtor in the books of
Applebee Limited for the year ended 3 1 December 20X9.
Ignore all taxes.
Question 19.15
Midnite Corporation is a company involved in the entertainment industry. It recently decided
to import a range of new lighting equipment costing C400 000. Once the equipment had
arrived at their premises (1 January 20X6), it became evident that Midnite Corporation did
not have the expertise necessary to operate the sophisticated equipment.
The CEO then made a few calls and found a company (DAT Entertainment) that wanted to
acquire the equipment. Unfortunately, however, DAT Entertainment did not have adequate
funds to purchase the equipment immediately. The CEO was reluctant to leave the equipment
lying around, and therefore came up with the following agreement:
He would lease the equipment to DAT Entertainment, immediately (I January 20X6).
The equipment would be leased to DAT Entertainment for a period of 3 years.
Chapter 19
229
I
3
Leases
At the end of 3 years DAT Entertainment would have to pay an amount of C20 000 and
ownership would then transfer.

The lease rentals are Cl 50 000 paid annually in advance.
Other information includes:
A fair market interest rate for agreements of the above nature is 17.082%.
The tax authority taxes lease instalments when received.
The normal tax rate is 30%. There is no transaction tax (i.e. no VAT).
The useful life of the equipment is estimated to be 3 years and this is the same period over
which the tax authority allows the equipment to be written off for tax purposes.
Required:
Provide the journal entries required to account for the above information in the records of
Midnite Corporation.
Question 19.16
Automatic Ltd (a dealer and manufacturer) sold a vehicle to Betamatic Ltd under a finance
lease agreement. The fair value of the vehicle is C246 760 on transaction date.
The markup (to normal cash selling price) is 30% on cost.

The details of the lease agreement are as follow's:
Lease term is 5 years commencing 1 January 20X5

Annual arrear payments beginning on 3 1 December 20X5 are C70 000
A guaranteed residual value is due on 3 1 December 20X9 of C50 000
The market interest rate is 17%
The lessor incurred initial direct costs of C2000 cash.
Automatic Ltd follows IAS 17 and has correctly classified the lease as a finance lease.
Automatic Ltd has a 3 1 December year-end.
The profit before tax (correctly calculated for the lease agreement) is C600 000 (it contains no
temporary or permanent differences other than those evident from the above transaction).
Required
Prepare the journal entries for the 20X5 financial year in the records of Automatic Ltd.
Ignore normal tax.
Chapter 19
230
Leases
Question 19.17
Faith Limited entered into four lease agreements during the 20X7 financial year. Details
regarding these leases are given below.
Factory Building:
Faith Limited leased a factory building to Olga Limited on the 1/1/X7. The lease is
classified as an operating lease.
The lease agreement provides for the following lease instalments (excluding VAT),
receivable annually in arrears:
20X7
20X8
20X9
20X10
100 000
200 000
300000
200 000
Contingent rentals of 1% of Olga Limiteds operating profit are also required. Olga
Limited generated operating profit of C5 000 000 in 20X7.
This building was originally purchased on 1/1/X2 for CIO 000 000 (excluding VAT).
Vehicle:
Faith Limited leased a vehicle from Stantheman Limited on the 1/1/X7. The lease is
classified as a finance lease.
The rate implicit in the lease agreement is 10%.
There are five lease instalments due of C527 595 each (including VAT). These are
payable annually in arrears.
The fair value of the vehicle was C2 000 000 (including VAT) at inception of the lease.
Initial direct costs of C57 000 (including VAT) were incurred by Faith Limited
Plant:
Faith Limited, being a manufacturer of plant, leased an item of plant to Regan Limited
(where Faith Limited is the lessor), effective from the 1/1/X7. The lease is classified as a
finance lease.
Three lease instalments of C329 003 (including VAT) are required annually in advance.
The rate implicit in the lease agreement is 10%.

The asset originally cost Cl 000 000 on the 1/1/X5 (excluding VAT).
The selling price stated in the agreement was C900 000 (including VAT).
Initial direct costs of Cl 14 000 (including VAT) were incurred by Faith Limited. These
costs are allowed as a deduction by the tax authorities in the year incurred.
Chapter 19
231
.*::
Leases
Land:
s
Faith Limited leased land from Mali Limited from the 1/1/X7. This lease is classified as
an operating lease.
Payments of C1 000 000 are required annually (excluding VAT) for a period of 10 years
The tax rate is 30%.
All parties mentioned are VAT vendors. The VAT rate is 14%.
Faith Limited policy on depreciation is to depreciate all assets on straight line to nil
residual at the following rates:
Factory Building
Vehicles
Plant
10%
25%
20%
The tax authorities provide a tax depreciation allowance on assets calculated on cost at the
following rates:
Factory Building
Vehicles
Plant
5%
33 1/3%
25%
Faith Limiteds profit before tax (correctly calculated) was R5 000 000 in 20X7.
Required
Prepare, in accordance with International Financial Reporting Standards, Faith Limiteds:
statement of financial position;
statement of comprehensive income; and
notes to the financial statements.
for the financial year ended 3 1 December 20X7.

Chapter 19
232
Statement of financial position disclosure:

Equity and liabilities
_
|Part -*1
Chapter 20
Question
20.1
20.2
20.3
20.4
Key issues
Understanding the raising of funds by the issue of debentures or preference
shares
Redemption of preference shares, debentures
Redemption of preference shares in installments, debentures
Redeemable preference shares, debentures
Chapter 20
233
Statement of financial position disclosure

Equity and liabilitie
Question 20,1
Stylish Limited has been operating successfully in the clothing retail business for a number of
years and has stores all over Pakistan. Its directors believe that in order to control inventory more
efficiently and to promote the companys modem image, it would be beneficial to install at all
stores computerised bar code scans which would automatically update stock records. The
company would need to obtain C500 000 from external sources in order to undertake this
venture.
The directors do not wish to issue shares that have voting rights. They are considering the issue
of either debentures or redeemable preference shares as a means of raising the necessary finance
but are unsure as to which to select.
The company has generated satisfactory profits over the past three years and its gearing ratio
(total debt : total assets) is currently 30%, with debt amounting to Cl.2 million. The company
has however experienced some cash flow difficulties in the past due to the large amounts needed
to finance working capital. The industry demands a fair amount of inventory selection and
generous credit terms (six months), which are not reciprocated by suppliers. It is expected that
the improved inventory control resulting from the computerisation will alleviate these problems
to some extent. The directors are optimistic about the companys future but would prefer not to
be committed to a specific date for the repayment of borrowings.
Required:
Discuss in point form the factors which need to be considered by the directors of Stylish Limited
in deciding whether to raise the required funds by issuing debentures or preference shares.
Question 20.2
Williamson Limited issued 15 000 Cl 10% redeemable preference shares on 1 March 20X1.
The shares are subject to compulsory redemption by the company on 28 February 20X4. On
28 February 20X4 the directors resolved to redeem the preference shares at a premium of C0.05
per share. This was in accordance with the terms of the original issue.
In order to obtain funds for the redemption, the company issued 20 000 unsecured, Cl
12% debentures on 1 February 20X4 at a discount of 3%, to be redeemed on 31 January 20X9
at a premium of 2%. These debentures were issued at an effective interest rate of 13.1640%.
The directors wish to utilise the share premium account to the maximum extent possible. The
balance on the retained earnings account was CI20 000 at 28 February 20X4, before any entries
had been processed relating to the effect of the above transactions on the debentures, preference
shares and dividends.
Required:
Prepare an extract from the statement of financial position and notes to the financial statements
of Williamson Limited for the year ended 28 February' 20X4, in terms of the requirements of the
Companies Ordinance, 1984 and International Financial Reporting Standards.
Calculations must be made to the nearest whole number.
Chapter 20
234

Question 20.3
The following balances were extracted from the trial balance of Nourish Limited at
27 February 20X7 (before the redemption of the preference shares):
Debit
Ordinary share capital (Cl shares)
Share premium
Retained earnings at 27/02/20X7
12% Preference share capital (Cl shares)
Premium accrued - preference shares
12% Debentures (Cl par value)
Discount on issue - debentures
Premium accrued - debentures
Bank
Credit
100 000
25 000
78 000
30 000
498
15 000
150
0
25 000
The following information relates to preference shares:

The preference shares, which were issued at par on 1 March 20W7 are subject to
compulsory redemption by the company in three equal annual installments starting on
28 February 20X5. The remaining 30 000 preference shares are due for redemption
on 28 February 20X7 at a premium of 2%, which was provided for at the date of issue
in the articles of association.
The accounting entry to record the payment of the preference dividend as well as the
related effective interest and premium accrued for the year ended 28 February 20X8
has not yet been processed.
The minutes of the most recent directors meeting reflect the decision to use C15 000
from the bank account to pay all amounts owing to the preference shareholders and to
raise the balance needed through an issue of ordinary shares at a premium of C0.20
per share.
Entries in respect of the redemption of preference shares and the new shares issued
have not yet been passed.
The distributable reserves are to be minimally impacted in accounting for the above.
The debentures were issued on l June 20X6 at a discount of 1% and are redeemable at
a premium of 1.5%, in equal annual installments over 3 years. The first repayment is
due on 31 May 20X8. Interest is payable annually in arrears on 31 May. The
debentures were issued at an effective interest rate of 12.87537%. Entries for the
current year in respect of the amortisation of the discount or premium have not yet
been passed and interest has not been accrued.
Required:
Disclose the above information in the statement of financial position of Nourish Limited for
the year ended 28 February 20X7.
Notes are not required. Round off to the nearest whole number.
Chapter 20
235

_ Equity and liabilities
Question 20.4
Scott Limited is a company listed on the stock exchange. The company exports swimming
pool equipment and chemicals.
SCOTT LIMITED
EXTRACT FROM TRIAL BALANCE AS AT 30 JUNE 20Y0
Debit

15% Redeemable preference share capital
Retained earnings - 30/6/X9
14% Debentures - 30/6/X9
Debenture discount - 30/6/X9
Net profit before interest and taxation
Taxation
Bank
Dividends paid - ordinary
- preference
Loan - Investments Bank
Shareholders application account
Payments to preference shareholders
Interest paid on debentures
Interest paid on loan - Investments Bank
Credit
500 000
200 000
335 500
200 000 j;
4 947
1688
265 750
70 227
160 250
12 500
15 000
120 000
168 750
235 000
14 000
13 000
The authorised share capital of the company consists of:
500 000 ordinary shares with a par value of C2 per share.

500 000 redeemable preference shares with a par value of C0.50 per share.
On 1 September 20X9 the share premium was fully utilised to make a capitalisation issue
of 1 share for every 9 shares to ordinary shareholders. On 30 June 20X9 225 000
ordinary shares were in issue.
The redeemable preference shares were issued at par on 1 January 20X4. These
preference shares are redeemable at a premium of C0.05 per share at the option of the
company any time after 31 December 20X8. Management has classified these shares as
equity for reporting purposes. The premium on redemption was provided for in the
Articles of Association at the date of issue. The directors resolved to redeem all of the
preference shares and pay the final dividend on 30 June 20Y0. The funds for the
redemption were provided by issuing 75 000 ordinary shares on 30 June 20Y0 at a
premium of C0.25 per share and the balance was provided from the companys bank
account. The total cash paid to the preference shareholders has been debited to
Payments to preference shareholders.
Share issue expenses of Cl 688 were incurred on the ordinary shares issued on
30 June 20Y0 but have not yet been paid. The directors want to use the share premium
account to the maximum extent possible for the redemption of the preference shares and
for writing off the share issue expenses.
Chapter 20
236

The company issued 200 Cl 000 14% debentures on 1 July 20X7 at 95% of their face
value. Interest is payable semi-annually in arrears on 1 January and 1 July. The
debentures are secured by a mortgage over land worth C300 000 and were issued at an
effective interest rate of 15.918% compounded semi-annually. The debentures are
redeemable at par on 31 December 20Y0.
On 1 March 20X8 a loan of Cl50 000 was obtained from Investments Bank, which bears
interest at 13% p.a. payable annually in arrears on 28 February. The loan is repayable in
five equal annual installments commencing 1 March 20Y0.
At the annual general meeting the directors were granted a general authority to issue any
unissued shares at their discretion at any time before the next annual general meeting.
The directors declared a final ordinary dividend of CO.10 per share on 31 July 20YO. The
financial statements were authorised for issue on 5 August 20Y0 by the board of
directors.
Required:
To the extent the information allows, prepare the statement of comprehensive income, statement
of changes in equity and statement of financial position notes of Scott Limited for the year
ended 30 June 20Y0, in terms of International Financial Reporting Standards and the
Companies Ordinance, 1984.
Accounting policies, dividends per share disclosure and comparative figures are not required.
Chapter 20
237

Chapter 20
238
I*
Non-current assets held for sale and
_ discontinued operations
[Part 5]
Chapter 21
discontinued operations
Question
Section A
21.1
21.2
21.3
21.4
21.5
Section B
21.6
21.7
21.8
21.9
21.10
:
21.11
21.12
Key issues
Non-current assets held for sale

Non-current asset held for sale: prior measurement under the cost modeljournals and disclosure (with and without tax)
Non-current asset held for sale: prior measurement under the cost modeljournals and disclosure (with and without tax)
Non-current asset held for sale: prior measurement under the cost model:
journals and disclosure (with tax)
Non-current asset held for sale: prior measurement under the revaluation model:
journals and disclosure (with and without tax)
Non-current asset held for sale: prior measurement under the revaluation modeljournals and disclosure (with and without tax)
Discontinued operations
Understanding the identification of a discontinued operation
Understanding the disclosure of information relating to discontinued operations,
disclosure of the note to the discontinued operation
Statement of comprehensive income, note and tax implications of discontinued
operation
Brief discussion and disclosure of statement of comprehensive income, note and
tax implications of discontinued operation
Discussion components and disposal groups and disclosure of statement of
comprehensive income, statement of changes in equity, statement of financial
position and notes to the discontinued operation, (with tax adjustments)
Statement of comprehensive income, and notes on the discontinued operation,
(with tax adjustments) and discussion of investment properties held for sale
Discussion of the raising of provisions in respect of retrenchment packages
Chapter 21
239

Question 21.1
Eradicate Ltd owns only one item of property, plant and equipment being plant, which it has
always carried under the cost model, details of which follow:
Cost (1 January 20X1)
Depreciation
Recoverable amount (31 December 20X2)
C500 000
20% pa straight-line to a nil residual value
C210000
On 1 April 20X3, the company decided to sell the plant. All the criteria necessary for
reclassification as a non-current asset held for sale were met on this date. The following
information was relevant on this date:
C200 000
CIO 000
Cl60 000
Fair value
Costs to sell
Value in use
At 31 December 20X3 (the companys year-end) the following information was relevant:
Fair value
Costs to sell
C300 000
CIO 000
Required:
Part A:
Ignoring tax:
a) Show all journal entries relevant to the above information.
b) Disclose the effect on the statement of financial position, related notes and profit before
tax note for the year ended 3 1 December 20X3. Accounting policies are not required.
PartB:
Assume the following information regarding tax:
The tax authorities allow a wear and tear deduction of 25% of cost (not apportioned).

tax note for the year ended 3 1 December 20X3. Tax and accounting policies notes are not
required.
Question 21.2
Outahere Ltd owns only one item of property, plant and equipment being plant, which it has
always carried under the cost model, details of which follow:
Depreciation
Recoverable amount (31 December 20X2)
Chapter 21
C500 000
C210 000
240
m
>:

* On i April 20X3, the company decided to sell the plant. All the criteria necessary for
Value in use
Fair value
Costs to sell
C200 000
C200 000
CIO 000
080000
CIO 000
Fair value
Costs to sell
Required:
Part A:
Ignoring tax:
tax note for the year ended 3 1 December 20X3. Accounting policy notes are not required.
Part B:

tax note for the year ended 31 December 20X3. Tax and accounting policy notes are not
required.
Question 21.3
Jovial Ltd owns only one item of property, plant and equipment being a machine. Jovial Ltd
purchased this machine at a cost of C250 000 on 1 January 20X5. It has always carried this
machine under the cost model.
On 1 April 20X7, the company decided to sell the machine and all the necessary criteria to
reclassify the machine as a non-current asset held for sale were met.
The machine is expected to have a useful life of 5 years.

a
The tax authority allows the machine to be deducted over 4 years (not apportioned).
The machine had the following values:
3 1 December 20X6: recoverable amount
1 April 20X7: fair value less costs to sell (value in use: 90 000)
31 December 20X7: fair value less costs to sell (value in use: 105 000)
Cl05 000
C 95 000
Cl45 000
Chapter 21
241
Required:
tax note for the year ended 31 December 20X7. Notes relating to tax and accounting
policies are not required.
Question 21.4
Tossout Ltd owns only one item of property, plant and equipment being plant, which it has
always carried under the revaluation model, details of which follow:
Depreciation
Fair value (1 January 20X2)
C500 000
C800 000
Tossout Ltd always uses the net replacement method to account for changes in fair value.
information w'as relevant on this date:
Fair value
C500 000
Costs to sell
C50 000
There was no indication that this asset was impaired.
Fair value
Costs to sell
C700 000
C40 000
The company has the policy of reversing a revaluation surplus on the eventual disposal of the
related asset.
Required:
Part A:
Ignoring tax:
tax note for the year ended 3 1 December 20X3. Accounting policy notes are not required.
'
Chapter 21
242

Part B:
* The normal income tax rate is 30%.

tax note for the year ended 31 December 20X3. Notes relating to tax and accounting
policies are not required.
Question 21.5
Cutaway Ltd owns only one item of property, plant and equipment being plant, which it has
always carried under the revaluation model, details of which are as follows:

Fair value (1 January 20X2)
Depreciation
C500 000
C800 000
Cutaway Ltd always uses the net replacement method to account for changes in fair value.
C650 000
Fair value
Costs to sell
C50 000
There was no evidence that this asset was impaired.
C500 000
C30 000
Fair value
Costs to sell
The company has the policy of reversing a revaluation surplus on the eventual disposal of the
related asset.
Required:
Ignoring tax:
tax note for the year ended 31 December 20X3. Accounting policy notes are not required.
Question 21.6
Bettenwood Limited is a listed company with 31 October year-end. It has three industrial
divisions - tyre manufacturing, engine blocks and body panels - located at Richards Bay,
Chapter 21
243
Nelspruit and Jacobs, respectively. Management reports are available from each of the three
divisions. The following matters were raised at the directors meetings:
15 July 20X1: Concern was expressed
at the perpetual poor results of the tyre

manufacturing division and a decision was reached, in principle, to discontinue the
division.
25 August 20X1: It w-as unanimously agreed and announced to employees, customers

and creditors that the tyre manufacturing division should be discontinued by sale. Mr.
Schuma, the managing director announced that negotiations to sell the entire tyre
manufacturing division had been entered into with Suba Limited as part of the
implementation of the disposal plan. The sale is expected to be made within a few
months.
23 September 20X1: Mr. Schuma reported to the board of directors that the negotiations
with Suba Limited had proceeded well, and that a contract had been signed whereby the
tyre manufacturing division would be sold on 5 December 20X1.
Mr. Burger, the financial director, reported to the board that the tyre manufacturing divisions
assets would be realised at a loss of C50 000.
Required:
Discuss whether management would be justified in treating the tyre manufacturing division as a
discontinued operation, in terms of IFRS 5: Non-current Assets Heldfor Sale and Discontinuing
Operations, in the financial statements for financial year ending on 31 October 20X1.
Question 21.7
The following information relates to Evergreen Ltd. The company manufactures soccer balls
and hosepipes. During 20X5 it became obvious that the soccer ball division was no longer
profitable. During 20X6 this segment's results deteriorated further.
The abridged information for the soccer ball division is as follows:
20X6
C
3 750
1 500
2 700
135
75
600
120
1 695
750
2 250
Revenue
Cost of sales
Other expenses
Finance costs
Income tax expense
Inventory
Accounts receivable
Equipment
Bank overdraft
Head office account (Cr)
On 18 December 20X6 the board formally decided to sell the soccer ball division to a large
sporting goods manufacturer at a reasonable market value within four months. At this date,
the board committed to a formal plan detailing the execution of the sale.
Chapter 21
244

On 10 February 20X7 the contract for the selling of the soccer ball division was signed. The
buyer agreed to take over the contracts as well as the assets and liabilities of the soccer ball
segment as from 1 March 20X7.
In terms of the contract, equipment is deemed to be worth C2 250 and all the other assets and
liabilities are deemed to be worth their carrying amounts. No reason exists to doubt the
successful fulfillment of the contract.
The financial statements
31 March 20X7.
at
31 December 20X6 will be approved for publication on
Required:
a) Discuss from which financial year the information about the discontinued operation
should be separately disclosed.

b) Discuss how the discontinued operation affects the format for the presentation of the
financial statements of the current year and the presentation of comparative figures.
c) Disclose the note to the discontinued operation in the financial statements of

Evergreen Ltd at 31 December 20X6 to comply with the minimum requirements of
Question 21.8
Mandos Ltd owns and manages a number of hotels. Mandos owns a number of branches
situated throughout Pakistan including Faisalabad.
However, its profits from its Faisalabad division have been on the decrease due to a financial
and political crisis within the country. As a result the board of directors met on
29 November 20X8, to discuss the situation regarding the Faisalabad branch. After much
deliberation, the board of directors approved a formal plan to dispose of its operations within
Zimbabwe. All parties concerned were immediately notified of the plan. The non-current
assets were classified as held for sale on this date.
The division sold its equipment on 30 November 20X8. The remaining assets would be sold
off separately. The following journal entry was recorded.
Debit
30 November 20X8
Bank
Disposal
Sale of equipment
Credit
420 000
420 000
Management estimated it will cost C90 000 to compensate the employees who will be
affected. This will be paid during March 20X9 and will be allowed as a tax deduction by the
tax authority in the year in which it is paid.
Fair value less costs to sell of the remaining assets at 31 December 20X8:
59 000
39 600
700 000
32 000
Inventory'
Accounts receivable
Buildings
Furniture
Chapter 21
245
Total useful lives of assets, and write off period allowed by tax authority (no apportionment):
Buildings (not depreciated and no tax allowance granted)

Furniture
Equipment
10 years
10 years

The tax authorities allow the write down of inventory and the provision for doubtful debts as a
deduction in the current year of assessment.
The normal
differences.
tax rate
is 30% and deferred tax must be provided for on all temporary
The information relating to the Faisaiabad branch is reflected in the following trial balance
extract.
MANDOS LTD - FAISALABAD BRANCH

EXTRACT OF THE TRIAL BALANCE AT 31 DECEMBER 20X8
Revenue
Accounts payable
Disposal
Buildings (at cost)
Equipment (carrying amount): 1 January 20X8
- Original cost C600 000 on 1 January 20X4
Furniture (carrying amount): 1 January 20X8
Inventory
Accounts receivable
Other expenses
Current tax payable
(1 180 000)
(31 200)
(420 000)
600 000
360 000
38 400
64 000
43 000
1 106 400
(22 080)
Required:
a) Prepare the discontinued operation section of the statement of comprehensive income of
Mandos Ltd for the year ended 31 December 20X8 in accordance with the requirements
of International Financial Reporting Standards. Show the analysis of discontinued

operations on the face of the statement of comprehensive income.
b) Disclose the notes to the discontinued operation for the current year in accordance with
the requirements of International Financial Reporting Standards.
Question 21.9
Toys Arent Us Ltd operates in two separate divisions, one that manufactures toys and
another that sells soft drinks. On the 30th May 20X1, senior management decided to sell the
toy division as this division was no longer profitable. On 30th June 20X1 a formal disposal
plan was approved by the board of directors. The division was expected to be sold within 6
months. The carrying amounts of all assets and liabilities in the disposal group were re
measured in terms of the applicable International Financial Reporting Standard.
A sale agreement was entered into on 30 September 20X1 to sell the entire toy division for
55 000. The costs directly associated with the sale of the division would be approximately
Chapter 21
246
1
:
Non-current assets held for saie and

Cl 000. At that date, both parties agreed that bad debts of Cl 250 should be written off and
that inventory amounting to Cl 250 was considered to be obsolete (tax deductions are allowed
in the year the expenses are incurred).
The directors determined that the cost of employee terminations with respect to the
discontinuance of the toy division would amount to C5 000. These expenses are not allowed
as a tax deduction as they are directly related to the decision to discontinue the operation and
therefore are not in the production of income.
None of the costs mentioned above have been included in the trial balance at the
30 September 20X1. The following is an extract of balances relating to the toy and soft drinks
divisions at 30 September 20X1:
Toys
Equipment, at carrying amount (original cost C90 000)

Inventory
Accounts receivable
Accounts payable
Income tax expense

Revenue from sales
Cost of sales
Other expenses (includes depreciation on the equipment
for 9 months)
C
47 250
12 500
7 500
7 250
?
75 000
50 000
20 000
Soft drinks
C
5 000 000
1 125 000
875 000
600 000
1 350 000
7 500 000
2 250 000
750 000
Depreciation and wear & tear are both 10% per annum. The wear and tear allowance is
apportioned. At the beginning of the year, the carrying amount of the equipment was the
same as the tax base. The tax rate is 30%,
The sale agreement was signed on 30 November 20X1.
Required:
a) Identify, with reasons, the date at which the division would be classified as held for sale.
b) Prepare the statement of comprehensive income of Toys Arent Us Ltd for the year ended
30 September 20X1 and disclose only the note to the discontinuing operation and tax in
accordance with International Financial Reporting Standards. Accounting policy notes
are not required.
Question 21.10
Voetstoets Ltd currently operates in two divisions, as a manufacturer of bicycles as well as a
retailer of leather shoes.
The directors of Voetstoets Limited drew up a formal plan on 30 September 20X4 to dispose of
the bicycle division through various transactions. On 30 November 20X4 a buyer, Mr Kamran,
was found who wished to purchase the plant and equipment. On 3 1 December 20X4 he
purchased all the plant and equipment for 168 000 cash. It was expected that the disposal of
Chapter 21
247
the entire bicycle division would be completed by February 20X5. Voetstoets Ltd is not actively
seeking buyers for the current assets and liabilities of the division.
Assets are expected to realise the following amounts:
C
156000
33 000
168 000
Accounts receivable at 31 December 20X4

Inventory at 31 December 20X4
Plant and equipment (amount paid by Mr Kamran on 31/12/20X4)
The following summarised trial balances were extracted from the books of Voetstoets Limited
at 31 December 20X4.
Information relating
Total
20X3
20X4
C
C
600000
600 000
509 895
171 885
2
334 000
3 282 000
75 000
67 500
4 459 395
3 180 885
Share capital
Retained earnings
Revenue
Accounts payable
Plant and equipment at carrying amount

(Historic cost of bicycle equipment: C200
000)
Inventory
Accounts receivable
Cash
Cost of sales
Other expenses (including depreciation at
10% pa and IFRS 5 impairment on
bicycle equipment)
Dividends paid
Taxation
to the bicycle division

included in the total
20X3
20X4
582000
30000
601200
37 500
813 150
720 000
142 000
160 000
263 685
168 000
229 650
2 100 000
498 300
156 000
192000
116 895
1400 000
279 700
42 000
168 000
81000
192 000
i
420 000
78 300
350000
29 200
1
180 000
206 610
4459 395
120 000
196290
3 180 885
Additional information about the bicycle division
The other expenses of C78 300 (20X3: C29 200) in the trial balance of the bicycle division
include the following:
Redundancy packages paid to employees

Bad debts
20X4
C
24000
6000
20X3
f
12000
The sale of the plant and equipment has not yet been recorded. The carrying amount and the
tax base of the plant and equipment were the same at the beginning of the year.
* All accounts payable balances at 3 1 December 20X4 will be paid by Voetstoets Limited in
January' 20X5.
Chapter 21
248
it

The continuing operations have not created any deferred tax.
The
inventory and accounts receivable adjustments and the redundancy

deductible for tax purposes as they were incurred.
Taxation has been provided at a rate of 30%.
costs
were
The taxation authorities provide for wear and
tear at 10% p.a. (not apportioned).
Assume that dividends carry' no tax consequences.

Required:
a) Discuss whether the bicycle division can be classified and presented as:
i) a discontinued operation
ii) a disposal group held for sale
b) Prepare the statement of comprehensive income, statement of financial position and
statement of changes in equity of Voetstoets Limited for the year ended
31 December 20X4, in accordance with the requirements of International Financial
Reporting Standards. No notes are required.
c) Disclose the note to the discontinued operation and the note to the tax expense in
Question 21.11
Big Nic Ltd owns and manages a number of restaurants. The company operates through
branches in all the main cities in South Africa as well as in Swaziland.
BIG NIC LTD

EXTRACT OF THE TRIAL BALANCE AT 31 DECEMBER 20X5
Revenue
Accounts payable
Disposal
Land & buildings (at cost)
Equipment (carrying amount)
Furniture (carrying amount)
Inventory
Accounts receivable
Other expenses
Current tax payable
Swaziland
C
590000
15 600
210 000
300 000
152 500
17 000
32000
21500
553 200
11040
Due to political uncertainties in Swaziland, profits earned by the division have decreased.
no longer
The company decided to terminate its operations in this country as they were
considered to be financially viable. At a board meeting held on 1 November 20X5, the
Chapter 21
249
I
*
Non-current assets heid for sale and

board of directors approved formal plan for the disposal of the operations in Swaziland by
selling the assets in a number of transactions. This decision was announced publicly
immediately after the meeting. The non-current assets were classified as held for sale on an
individual basis on this date.
During 1 December 20X5 the division's equipment was sold for C210 000.
Payment for the

equipment was deposited in the bank and credited to a disposal account on this date. This
was the only entry processed for the sale of the equipment.
Management has estimated that C45 000 will have to be paid to compensate employees
whose jobs will become redundant as a result of the closure of the Swaziland operations.
The compensation will be paid during March 20X6 and will be allowed as a deduction by
the Tax authority only in the following year of assessment.
Management has valued the remaining assets at the following fair values less costs to sell at
31 December 20X5:
C
350 000
16000
29 500
19 800
Land & buildings
Furniture
Inventory
Accounts receivable
It is expected that the remaining assets will be sold and the accounts payable settled by
30 June 20X6.
Land and buildings are not depreciated and the taxation authorities do not allow any
deductions on these assets.
Furniture and equipment are both depreciated at 10% per annum on a pro-rata basis and
depreciation is included in other expenses. The taxation authorities allow the same
deduction, however not-apportioned.
The taxation authorities allow the write down of the inventory and the provision for doubtful
debts as a deduction in the current year of assessment.
The applicable tax

differences.
rate
is 30%. Deferred tax must be provided for on all temporary

<

Required:
of
Big Nic Ltd for the year ended 31 December 20X5 in accordance with the requirements of
International Financial Reporting Standards. Show the analysis of discontinued operations
on the face of the statement of comprehensive income. No notes are required.
a) Prepare the discontinued operation section of the statement of comprehensive income
b) Disclose the notes to the discontinued operation for the current year only in accordance with
the requirements of International Financial Reporting Standards. Accounting policy notes
are not required.
Chapter 21
250
Non-current assets heid for sale and

c) Discuss the implications to the financial statements if the land and buildings had been
accounted for as investment property under the fair value model of IAS 40, assuming fair
value of the land at the beginning of the year was the same as original cost and tax base.
Question 21.12
The directors of Drummer Limited decided in a directors meeting in December 20X3 to sell the
Bin division, one of its smaller businesses. The directors have estimated that the cost of paying
retrenchment packages to the fifteen staff members will be in the order of CIO million. The
accountant of Drummer Limited believes that it would be prudent to make a provision for this
amount.
Required:
Discuss whether or not the accountant would be correct in making a provision for
retrenchment packages in the financial statements for the year ended 31 December 20X3.
Chanter 21
251
'Part 5[
Chapter 22
Question
22.1
22.2
22.3
22.4
22.5
22.6
22.7
22.8
22.9
Key issues
Understanding the accounting for various items in the cash flow statement
Direct method, operating activities section
Direct method, calculation and explanation of ratios, preference share issue,
debentures
Direct method, operating activities section, bad debts, deferred tax
Direct method, operating and financing activities sections
Direct method, understanding cash management, redemption of preference
shares, capitalisation issue
Basic preparation on direct method
Basic preparation on direct method
indirect method, tax and ratio analysis
Chanter 22
253
Question 22.1
Discuss how the following items would be accounted for in a companys cash flow statement:
a) debenture discount written off
b) goodwill being impaired
c) deferred taxation included in the statement of comprehensive income tax charge

d) an under-provision of taxation in the previous year
e) share issue expenses of C2 000 incurred during the year of which Cl 000 is written off
against share premium.
Question 22.2
Hickory Limited manufactures clocks, which it sells to retailers around the country. The
following balances were extracted from its financial statements for the years ended
31 July 20X5 and 20X6 respectively:
Revenue
Cost of sales
Plant and equipment
Accumulated depreciation - plant and equipment
Inventory
Accounts receivable
Trade payables
Accrued expenses
Current tax payable
20X6
C
3 000 000
2 000 000
390 000
500 000
50 000
340 000
450 000
25 000
250 000
15 000
2 000
20X5
c
2 000 000
1 300000
240 000
450 000
45 000
348 500
400 000
18 000
235 000
1 500
New plant costing C90 000 was purchased during the year. Plant with a carrying amount
of CIO 000 was sold during the year at a profit of C5 000.
The tax rate is 40%. The depreciation expense equals the tax allowances granted by the
taxation authorities.
Required:
a) Prepare the operating activities section of the cash flow statement for the year ended
31 July 20X6 using the direct method.

b) Prepare a reconciliation between profit before tax and cash generated from operations.
Chapter 22
254

:
II
Question 22.3
Oibas Limited was incorporated in 20X0 with an authorised share capita! of 1 000 000
ordinary shares of C 5 each and 500 000 10% non-redeemable preference shares with a par
value of C0.50 each.
The statement of comprehensive income, statement of changes in equity and statement of
financial position for 30 September 20X7 year are shown below:
OLBAS LIMITED
C
Revenue
Cost of sales
Gross profit
Dividends income
Operating expenses
Finance cost
Profit before tax
Income tax expense
3 500 000
(2 450 000)
1 050 000
3 200
(339 950)
(136 268)
576 982
(177 888)
399 094
0
399 094
OLBAS LIMITED
EXTRACT FROM STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR 30 SEPTEMBER 20X7 _
Retained
earnings
360 755
399 094
Balance 1/10/20X6
Transfers to non-distributable reserve
Dividends - Ordinary
- Preference
Balance 30/9/20X7
(70 000)
(225 000)
(25 000)
439 849
Chanter 22
255
s*
OLBAS LIMITED
ly.
20X7
C
ASSETS
Non-current assets
Land and buildings
Equipment at carrying amount
Equipment at cost
Accumulated depreciation: equipment
Vehicles at carrying amount
Vehicles at cost
Accumulated depreciation: vehicles
Investments
Current assets
Inventory
Accounts receivable
Prepaid expenses
Tax Refundable
Bank

Share premium
Retained earnings
16% Mortgage bond
20% Debentures
Current liabilities
Accounts payable
Interest payable
Current tax payable
Shareholders for dividends
1 750 000
312 000
480 000
(168 000)
20X6
2 200 000
280000
400 000
(120 000)
300 000
360 000
(60 000)
370 000
407 900
146 000
135 350
6 300
120 250
250 000
375 100
131 200
147 200
5 960
6 440
84 300
3 139 900
3 105 100
2 007 549
1 225 000
250 000
22 700
70 000
439 849
773 113
250 000
523 113
359 238
96 350
100 000
12 888
150 000
1 585 755
1 225 000
3 139 900
360 755
1 151 845
625 000
526 845
367 500
142 500
100 000
125 000
3 105 100
>
I
I
* During the year ended 30 September 20X7 500 000 preference shares were issued
at
C0.55 per share. Share issue expenses of C2 300 were paid, these expenses were written
off in such a way as to maintain maximum distributable reserves. The preference shares
are not redeemable.
The 20% debentures consist of 5 000 debentures of C100 each. On 1 October 20X5
Olbas Limited had issued the debentures at 106%. The debentures are all repayable on
30 September 20Y 1 at par. Interest is payable on 1 October each year. The debenture
premium is amortised using the effective interest rate method.
i
Chapter 22
256
During the year the following transactions relating to non-current assets and investments took
place:
Land and buildings were sold for 520 000. No further sales or purchases were made
and the profit on sale has been transferred to a non-distributable reserve.
Investments, which cost 125 000 were sold at a profit of C12 450.
Both these amounts are included in the profit before tax.
No equipment was sold during the year.
Accounts receivable are reflected on the statement of financial position net of a
provision for doubtful debts of 5 640 in 20X7 and C6 133 in 20X6.
The rate of normal tax is 35%.
Required:
a) Prepare the cash flow statement of Oibas Limited for the year ended 30 September 20X7
using the direct method in terms of IAS 7. Notes to the cashflow statement are required.
b) Prepare a reconciliation between the profit before tax and the cash generated from
operations.
c) Calculate the following ratios
'
Return on investment ratio (ROI/ROA), defining return as profit after tax but before
finance charges
Return on equity ratio (ROE)
Compare the return on investment and the return on equity and discuss whether the
company is using gearing effectively.
Question 22.4
The financial director of Mt Grace Limited is in the process of preparing the cash flow
statement for the year ended 30 June 20X5. She has prepared a set of working papers and
notes, as set out below:
bales for fear

= C5 200 000
30/06/X5 30/06/X4
845 000 720 000
Accounts receivable
34 000
71 500
30/06/X5 30/06/X4
510 000 340 000
305 000 210 000
Accounts payable
Inventor}'
-JO
(Remember the T&

shows a total debit in
respect of bad debts
of Oi5 500
Profit before tan =

01-20-000 OrlO-OOO
CUM 000
257
Dont forget to take into account die redeemable preference shares. They were issued at par
of C200 000 on 1 July 20X2 and are subject to compulsory redemption by the company on
30 June 20X7 at a premium of 4%, The nominal interest rate is 12%. The dividends have
been paid on 30 June each year. Note that the premium accrued is not deductible for tax
purposes.
Shareholders for ordinary dividend
;;
30/06/X5
35 000
30/06/X4
30 000
I know that deferred tax is one of your hottest topics, but I have prepared the following
schedule relating the plant and equipment that needs to be incorporated into the taxation
calculation.
Carrying
amount
Vte did not declare an

interim dividend during
the current >jear. The final
dividend of 35 000 was
declared on 25 Tune 20K5
01/07/X2
30/06/X3
30/06/X4
30/06/X5
Tax base
800 000
800 000
Depreciation / tax
(100000)
(320000)
allowance
Depreciation / tax
allowance
(100 000)
(160 000)
Cost
Depreciation / tax
allowance
Tax Payable (Current tax)
Temporary
Deferred
tax
280 000
81200
340 000
98 600
_ _ difference
600 000
320000
(100 000)
(160 000)
500 000
160 000
30/06/X5 30/06/X4
125 175 190 000
Don't forget the current

normal tan rate is V{%
There are no permanent or temporary differences other than those apparent from the above
information.
Required:
Prepare the operating activities section of the cash flow statement of Mt Grace Limited for the
year ended 30 June 20X5, using the direct method.
Notes are not required
Chaoier 22
Question 22.5
Shine Limited manufactures furniture oils products, which it sells to retailers around the
country. The following balances were extracted from its financial statements for the years
ended 30 June 20X3 and 20X4 respectively:
SHINE LIMITED
EXTRACT FROM STATEMENT OF FINANCIAL
POSITION
AS AT 30 JUNE
_
10% Redeemable preference shares
Retained earnings
Trade payables
Administration expenses accrued
Current tax payable
Inventory
Accounts receivable
Distribution expenses prepaid
Deferred tax asset
20X4
C
30 741
8 000
2 000
12 925
111 500
90 000
3 000
22 500
SHINE LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE _
Profit before tax
Taxation
20X3
c
64 716
80 000
10 000
10 000
2 000
131500
20000
2 000
20 000
20X4
C
53 216
(19 475)
33 741
0
33 741
The profit before tax is stated after taking into account the following expenses:
Cost of sales
Bad debts
Depreciation
Finance costs
Inventory is sold at a mark up of 110% on cost.
Dividends were declared in the current year.
C
120 000
3 000
1500
15 000
15 784
* 60 000 10% preference shares (par value of Cl) were subject to a compulsory redemption
premium of ? % on 30 June 20X4. The effective rate of interest on the preference
shares was 11.255%. No additional ordinary or preference shares were issued during the
at a
year.
The finance costs comprised interest on a mortgage loan and finance costs relating to the
preference shares.
Bad debts are written off as and when they are incurred.
Required:
Prepare the operating activities and financing activities sections only of the cash flow
statement of Shine Limited for the year ended 30 June 20X4, using the direct method.
Include interest and dividend payments under operating activities.

Question 22.6
Meadowvaie Manufacturers Limited commenced operations in June 20X1. Its summarised
financial statements for the year ended 30 September 20X7 were as follows:
MEADOYVVALE MANUFACTURERS LIMITED

ASSETS
Non-current assets
Land and buildings
Plant and machinery
20X7
COOOs
3 024
2 600
360
Goodwill
Unlisted investments
Current assets
Inventory
Accounts receivable
Listed investments
Bank
64
2 849
1 750
870
89
140
20X6
COOOs
2 795
2 405
246
100
44
1 363
159
500
84
620
5 873
4 158
3 477.2
700
68
400
164.2
25
2 120
3 018
450
72
500
120
50
1 826
975.8
5.8
970
1420
670
150
600
180
0
180
960
310
180
470
5 873
4 158

Ordinary shares of Cl each
Share premium
400 000 10% redeemable preference shares of Cl each
Capital redemption reserve fund
Retained earnings
Deferred tax
Long-term loan
Current liabilities
Accounts payable
Shareholders for dividend
Current tax payable
Chapter 22
260
MEADOWV ALE MANUFACTURERS LIMITED

COOOs
5 000
I 519
Revenue from safes

Profit before tax
Income tax expense
Revaluation of land and buildings
(800)
719
14.2
733.2
MEADOW VALE MANUFACTURERS LIMITED

EXTRACT FROM STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR 30 SEPTEMBER 20X7 __
NDR
cooo
Opening balance
Total comprehensive
income
Transfers to
Dividends
14.2
- Capital redemption reserve fund
- Non-distributable reserve
- Ordinary
- Preference
30
Closing balance
Retained
Earnings
C000
1 826
719
(100)
(30)
(250)
(45)
2 120
Profit before tax was arrived at after taking the following into account:
Bad debts - C5 000
Depreciation on plant and machinery - C90 000
Write down of listed investments - C7 000
Interest paid - C92 000
Impairment of goodwill - C100 000

Dividends received - C18 000
Profit on sale of land and buildings - C 50 000
Profit on sale of plant and machinery - C 4 000
Loss on trade in of plant and machinery - C 6 000
On 31 March 20X7, 100 000 redeemable preference shares were redeemed at a premium
of 4%. The preference shares are redeemable at the option of the company.
On 30 April 20X7, the company made a capitalisation issue of ordinary' shares, together
with a fresh issue of ordinary' shares at par.
Land and buildings, with a carrying amount of C90 (XX), were sold at a profit of C50 000.
The remaining buildings were re-valued during the year. There is no intention to sell the
remaining land and buildings and the cost of land is not material. .
There were no movements in the NDR other than those evident from the information
provided. The balance at the end of 20X6 arose from transfers from retained earnings.
or,)
The details of plant and machinery are:

20X7
590 000
230 000
360 000
Cost
Accumulated depreciation
Carrying amount
20X6
426 000
180 000
246 000
An item of plant, with a carrying amount of C140 000 was sold during the year at a profit
of C4 000. A machine that had originally cost C60 000 and that had been depreciated by
C25 000 was traded in at a loss of C6 000, in part payment of a new machine costing
C100 000. The balance was paid in cash.
In addition to the payment made in respect of the 20X6 tax liability, two provisional
payments totalling C100 000 each were made during the year ended 30 September 20X7.
* There
were no disposals of unlisted or listed investments during the year ended

30 September 20X7.
Required:
a) Prepare the cash flow statement and notes thereto, on the direct method, of Meadowvale
Manufacturers Limited for the year ended 30 September 20X7, in conformity with IAS 7.
c) Comment on the cash management of the company on the basis of the cash flow
statement you have prepared.
Question 22.7
The following financial statements relate to Spendee Limited:
SPENDEE LIMITED
DRAFT STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 20Y0
20Y0
C
ASSETS
Intangible assets
Inventory
Trade accounts receivable
Bank
LIABILITIES AND EQUITY
Share capital and reserves
Deferred taxation
Debentures
Trade accounts payable
Current tax payable
Bank overdraft
Chapter 22
20X9
C
400 000
105 000
70 000
20 000
0
595 000
300 000
50 000
50 000
30 000
900
430900
372 100
45 000
68 356
52 000
5 000
12 000
40 544
595 000
260 900
37 000
60 000
42 000
12 000
19 000
0
430 900
262
SPENDEE LIMITED
FOR THE YEAR ENDED 30 JUNE 2QYQ _
20Y0
C
I 750 000
(1 392 000)
358 000
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Finance cost
Profit before tax
Income tax expense
20X9
C
1 990 000
(1791000)
199 000
8 000
(240 000)
(20 000)
0
(92 000)
(20 000)
106 000
87 000
(39 800)
66 200
(24 100)
62 900
66 200
62 900
SPENDEE LIMITED
FOR THE YEAR ENDED 30 JUNE 20Y0
Share Revaluation Retained
Share
earnings
capital premium surplus
c
C
C
c
98 000
0
0
Balance - 1 July 20X8
100 000
62 900
0
160 900
Balance - 1 July 20X9
0
100 000
66 200
(30000)
Ordinary dividends
15 000
Revaluation surplus on land
10000
Ordinary share issue
50000
197 100
15 000
10000
Balance - 30 June 20Y0
150 000
Total
c
198 000
62 900
260 900
66 200
(30 000)
15 000
60 000
372 100
Included in profit before tax are the following:
C75 000
Cl 644
?
Depreciation of plant
Depreciation of equipment
Amortisation of development costs
The company has been developing two new products (A and B) during the past few years.
During the first three months of the current year, development costs incurred on product A
totalled C50 000, (bringing the total development costs incurred on developing product A
to C70 000). Development of product A ceased and commercial production began on
1 January 20Y0. Future economic benefits are expected to flow evenly from the sale of
product A from the date on which commercial production commenced for a period of
10 years. Development costs are paid in the year that they are incurred. All development
costs incurred have been capitalised.
(ThaDter
22
263
Plant with a carrying amount of C22 000 was sold at the beginning of the year. The
company purchased extra plant during the year in order to expand the business. The
revaluation surplus refers to land that was revalued on 1 July 20X9. No other purchases or
sales of property, plant and equipment took place during the current year.
Required:
a) Prepare, in conformity with International Financial Reporting Standards, the cash flow
statement of Spendee Limited for the year ended 30 June 20Y0, using the direct method.
Question 22.8
The following statement of financial position and statement of comprehensive income have
been prepared for Big Foot Limited for the year ended 3 1 December 20X8:
i
BIG FOOT LIMITED

AS AT 31 DECEMBER
Note
ASSETS
Non-current assets
Land and buildings
Plant and machinery
Development costs
Current assets
Inventories
Trade receivables
Bank
20X8
C
762 964
320 000
312 964
130 000
361 072
120 000
110 000
131072
20X7
C
510000
1 124 036
794 000
493 000
472 000
8000
13 000
542 036
527 036
15 000
89 000
55 000
12 000
4 500
17 500
450 000
440 000
300000
110 000
100000
284 000
80 000
45 000
159 000

Ordinary shares of Cl par value
Share premium
Retained earnings
Long-term loans
Deferred taxation
Current liabilities
Trade and other payables
Current tax payable
Interest payable
1 124 036
0
10000
281000
260 000
21000
63 000
20 000
5000
;
:
9 000
29 000
794 000
;
Chapter 22
264
1
A:
BIG FOOT LIMITED

20X8
C
654 000
Revenue
Cost of sales
Gross profit
Other income
Profit on sale of plant and machinery
Other expenses
(294 000)
360 000
20 000
(347 000)
(17 000)
Finance costs
Profit before tax
Income tax expense
16 000
(3 000)
13 000
13 000
Included in other expenses are the following items:
Depreciation on plant and machinery

Impairment of plant and machinery
Amortisation of development costs (see below)
C20 222
CIO 648
C?
Part of the office building was extended during the year. There were no other purchases
or sales during the year. Land and buildings are not depreciated. Half of the cost of the
extensions were financed via a mortgage bond, (see note on Long-term loans). The
balance of the cost was paid for in cash.
Plant and machinery with a carrying value of C15 866 was sold during the year.
Development costs relate to 2 products: Splodgets and Goodies. The development of

Goodies only began during the current year, whilst the development of Splodgets had
begun at the beginning of the prior year.
Splodgets: The company incurred a further C20 000 on developing the Splodgef
during the current year, all of which was capitalised. Development of the 'Splodget'
was completed and commercial production commenced on 1 July 20X8. Big Foot
believes that sales of Splodgets will continue for a total of 24 months, (i.e. no sales are
expected after June 20Y0).
Goodies: Development of Goodies began during the current year with all costs
incurred being capitalised. Commercial production of the Goodies is expected to
commence in July 20Y1.
The company issued 32 000 ordinary shares at C1.25 each.
Ordinary dividends of CIO 000 were declared during the year.
Chapter 22
265
C80 000 was repaid to Sub-standard Bank, the provider of the long-term loan. A portion
of the balance at 3 1 December 20X8 relates to a mortgage bond from Sub-standard Bank
that was raised during the year in order to cover half of the cost of the additions to the
office building, (see note above).
Assume that all transactions are for cash unless otherwise indicated.
Required:
Prepare the cash flow statement of Big Foot Limited for the year ended 31 December 20X8,
using the direct method, in conformity with International Financial Reporting Standards
Question 22.9
Sauron Steel Limited is a company that manufactures and wholesales pure aluminium steel
rings and rods used in the construction industry. The main income of Sauron Steel Limited is
derived from the sale of their indestructible rings and accounts for approximately 90% of
revenue. The company has been in operation for three years and has a 31 December year-end.
The following are extracts of the financial statements for the year ended 31 December 20X2.
SAURON STEEL LIMITED
EXTRACT FROM THE STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X2 _
C
80000
Profit before tax

Income tax expense
Revaluation of plant
(21 000)
59 000
105 000
164 000

Share Revaluation Retained
Share
earnings
Total
capital premium surplus
C
C
C
C
C
735 000
25 000
10 000
Balance at 1 January 20X1
700 000
262 000
262 000
997 000
287 000
10000
700 000
Balance at 3 1 December 20X1
110000
10000
100 000 Shares issued at Cl.10 100 000
(5 000)
(5 000)
164 000
105 000
59 000
(10000)
(10000)
Dividends - Interim
(10 000)
000)
(10
Dividends - Final
326 000 1 246000
105 000
15 000
800 000
Chapter 22
266

AS AT 31 DECEMBER 20X2
20X2
C
Non current assets
Land and buildings
Plant - at valuation (20X1 - at cost)
Plant-accumulated depreciation
Machinery-cost
Machinery-accumulated depreciation
Furniture and fittings - cost
Furniture and fittings - accumulated depreciation
Investments in listed companies
1000 000
650 000
(65 000)
240 000
20X1
950000
600 000
(100 000)
120 000
(35 000)
50 000
(15 000)
(20 000)
150 000
90 000
55 000
120 000
66 375
2 216 375
300 000
30000
55 000
2 065 000
Share capital and reserves

Share capital
Share premium
Revaluation reserve
Retained earnings
800 000
15 000
105 000
326 500
700 000
10000
0
287 000
Non current liabilities

Long term loan
Deferred tax
800 000
96 000
800 000
36 000
74 375
0
2 216 375
225 000
7 000
2 065 000
Current assets
Inventories
Accounts receivable
Cash and cash equivalents
Current liabilities
Accounts payable
Current tax payable
50 000
(10 000)
The profit before tax includes dividends received, depreciation and interest paid. The tax
expense has been correctly calculated and includes the current normal tax, deferred tax and
the adjustment to the prior years tax provision.
Land and buildings are not depreciated. The tax authority does not allow any deductions
on the land and buildings. There were no disposals of buildings during the year.
The plant was purchased on 1 January 20X0 for C600 000 and the useful life of the plant
was estimated on that date as 12 years. The tax authority considers that the useful life is
only six years and allows a wear and tear deduction accordingly.
The plant was re-valued on 1 January 20X2 by an independent valuator. The revaluation
is accounted for on the net replacement cost basis and the entity does not transfer the
realised portion of the revaluation surplus to retained earnings. The useful life of the plant
remained the same after the revaluation. There were no additions or disposals to plant in
the year,
Chapter 22
267
There were no disposals of machinery during the year, but the entity assembled new
machinery for the expansion of operations. This new machinery became available for use
as intended by management on 30 June 20X2. The machinery' assembled utilised
C100 000 of the entitys own inventories while management paid C20 000 for external
inventories and assembly costs. Machinery is depreciated over 12 years, while the tax
authority allows wear and tear based on a six year useful life, apportioned for part periods.
Furniture and fittings are depreciated at 10% per annum which is equal to its wear and
tear allowance. Furniture with a carrying amount of C30 000 was exchanged for furniture
of a slightly darker colour with the same fair value.
The deferred tax balance of C36 000 as at 31 December 20X1 comprises deferred tax on
plant of C30 000 and deferred tax on machinery of C6 000.
The amount owing to the tax authorities in respect of the 20X1 year was paid in May
20X2, after taking into account the assessment from the tax authorities. The assessed tax
for the 20X1 year according to the assessment amounts to C60 000. The company had
made provisional payments of C55 000 in that year and had provided C62 000 in respect
of current normal tax.
Two provisional payments were made in August and December 20X2 equal to the amount
provided for current normal tax.
The company has never paid dividends prior to 20X2. The company declared and paid an
interim dividend of CIO 000 on 30 June 20X2 and a final dividend of CIO 000 on
30 December 20X2. A dividend of C5 000 was received in March 20X2.
Authorised share capital consists of 1 000 000 ordinary shares of Cl each.
The share issue expenses have been paid in full.
The long term loan is payable in 20Y0 and interest is payable

interest for the year has been paid.
The company pays tax at 30%. Except for what is apparent above, no other temporary or
permanent differences exist.
at 15%
per annum. The
Required:
a) Prepare the taxation expense and the deferred taxation notes to the financial statements of
Sauron Steel Limited for the year ended 3 1 December 20X2.
b) Prepare the cash flow statement of Sauron Steel Limited for the year ended
3 1 December 20X2 according to IAS 7 Cash Flow Statements and using the indirect
method.
the interest cover of Sauron Steel Limited for the year ended
31 December 20X2 and comment on whether you think it is adequate, explaining what the
ratio measures.
c) Calculate

Notes to the cash flow statement are not required.

Chapter 22
268
>..v;
Borrowing costs
[Part 5\
Chapter 23
Borrowing costs
Question
23.1
23.2
23.3
23.4
23.5
23.6
23.7
23.8
23.9
23.10
23.11
23.12
Key issues
on
specific dates with investment of surplus
incurred
loan
costs
with
Specific
funds; construction began after the loan was raised; construction completed
before year end
General loan with costs incurred on specific dates; construction incomplete
General loan with costs incurred evenly over time; construction incomplete
General loan with costs incurred evenly over time; construction complete
Specific loan and investment of surplus funds, construction began from the date
that the loan was raised and was incomplete at year end
Part A: costs incurred on specific dates with investment of surplus funds and a
temporary delay in construction
Part B: extended delay in construction
Specific loan with costs incurred evenly; construction began from the date that
the loan was raised and was complete before year end; investment of surplus
funds: journals
Loans raised in a foreign currency and construction completed
Specific loan: compounding annually, payments incurred on specific days:
calculations and disclosure (including tax)
Specific loans: compounding annually, payments incurred on specific days:
calculations
Specific loans: compounding annually, payments incurred evenly during a
period and interest on monthly opening balances: calculations
General loans: compounding annually: journals and disclosure
Specific loans and general loans combined: compounding quarterly: journals
Chanter 23
269
Borrowing costs
Question 23.1
Money Limited began the construction of a new building on the 1 February 20X5.
Construction costs incurred in 20X5 were paid for as follows:
C
500 000
600 000
800000
On 1 February
On 1 July
On 1 November
The construction of the building ended on the 1 December 20X5 when the building was
complete and ready for its intended use. This building is to be depreciated over 10 years to a
nil residual value using the straight-line method.
The construction was financed by a loan of Cl 900 000 from Cash Limited. The loan was
raised on 1 January 20X5 specifically to facilitate the construction of the building. The
interest rate is 25% per annum. There were no capital repayments during the year. Surplus
funds were invested at 20% per annum. The interest is compounded annually.
The building is a qualifying asset for the purposes of IAS 23.

Required:
a) Calculate the amount of borrowing costs that are eligible for capitalisation during the year

b) Calculate the depreciation for the year ended 31 December 20X5.
c) Calculate the carrying amount of the buildings as at 31 December 20X5.
Question 23.2
Soccer Limited began the construction of a new stadium on the 1 January 20X5. Details of
the progress payments made during 20X5 are as follows:
C
300 000
200 000
250 000
150 000
200 000
On 1 January
On 1 April
On 1 July
On 1 September
On 1 October
The stadium was still under construction at 3 1 December 20X5.
The construction was financed by general borrowings within the company. General loans
outstanding at any one time during 20X5 averaged C20 000 000. The interest expense
incurred on these loans during 20X5 was C2 600 000.
The stadium is a qualifying asset as defined by IAS 23. Interest is payable (compounded)
annually.
Required:
a) Calculate the amount of borrowing costs that may be capitalised to the stadium during the
year ended 3 1 December 20X5.
Chapter 23
nnA
Borrowing costs

c) Calculate the carrying amount of the stadium as at 31 December 20X5.
Question 23.3
Rugby Limited began the construction of a new stadium on the 1 January 20X5. Details of
the progress payments made during 20X5 are as follows:
1 January 20X5 - 30 April 20X5
1 May 20X5 - 3 1 August 20X5
1 September 20X5 - 31 December 20X5
C
600 000
300 000
900 000
The stadium was still under construction at 31 December 20X5.

The construction was financed by general borrowings within the company. Genera! loans
outstanding at any one time during 20X5 averaged C20 000 000. The interest expense
incurred on these loans during 20X5 was C2 600 000. The financier compounds interest
every 4 months.
The stadium is a qualifying asset as defined by IAS 23.
Required:
a) Calculate the amount of borrowing costs that may be capitalised to the stadium during the

c) Calculate the carrying amount of the stadium as at 31 December 20X5.
Question 23.4
Yoodle Limited is in the process of constructing a factory building for its own use. At
31 December 20X4, a total of C450 000 had already been capitalised to the cost of the factory
building.
Cash flow was becoming tight near the end of December 20X4 and therefore, in order to have
sufficient resources available to the company, Yoodle Limited raised an additional loan of
C400 000, costing interest of 15% per annum (effective from 1 January 20X5). This loan is
to be used for a variety of purposes (it has not been raised specifically for the building costs).
Yoodle Limited had an existing general loan at 1 January 20X5 of C800000, costing interest
of 10% per annum. There are no other loans. No repayments on either loan were made
during 20X5 or 20X6. Interest is compounded annually.
Interest income yvas earned on the investment of funds from the general loans that were
surplus to requirements. Interest income earned was as follows:
Year ended 31 December 20X5

Year ended 3 1 December 20X6
C
45 000
92 000
271
Borrowing costs
The following construction costs were incurred during 20X5 (these were paid evenly over
each month):
C per
month
70000
40 000
90 000
1 January - 31 July (7 months)

1 August - 30 November (4 months)
1-31 December (1 month)
No construction costs were incurred during 20X6 although the builders laid a concrete slab
around the base of the building on 29 January 20X6. This slab required a month to cure
with the result that the building could not be brought into use until 1 February 20X6. This
delayed the installation of factory equipment, with the result that the factory was only brought
into use on 1 March 20X6.
The building is expected to have a useful life of 10 years and a nil residual value. The
straight-line method of depreciation is considered to be appropriate.
The building is a qualifying asset as defined by IAS 23.
Required:
Show the journal entries related to the above information in the books of Yoodle Limited for
the year ended 31 December 20X5 and 20X6 and provide as much disclosure as is possible
for the year ended 3 1 December 20X6. Ignore tax.
Question 23.5
Hockey Limited borrowed C2 000 000 (at an interest rate of 14%) from the Bank of Ball on 1
January 20X5. These funds have been borrowed in order to build a hockey stadium.
Progress payments made in 20X5 are as follows:

On 1 January
On 1 July
On 1 September
C
600 000
1 200 000
200000
The surplus funds were invested in a fixed deposit earning interest at 10% per annum.
The interest on both the fixed deposit and the loan are compounded annually (31 December).
Construction began on 1 January 20X5 and was still incomplete on 31 December 20X5.
Between 1 June and 20 June, construction ceased while concrete cured (a necessary part of
the construction process).
The stadium is a qualifying asset as defined by IAS 23.
Required:
a) Calculate the amount of borrowing costs that may be capitalised to the hockey stadium
cost account in the year ended 31 December 20X5.
b) Calculate the amount of borrowing costs that may be capitalised to the hockey stadium
cost account in the year ended 31 December 20X5 assuming that construction could not
Chanter 23
272
Borrowing costs
begin due to the building plans not meeting municipal standards. The plans have been re
submitted and it is expected that the municipality will give the go-ahead to begin
construction in early 20X6.
Question 23.6
On 1 January 20X5, Junk Limited issued 1 million C5 debentures. The debentures are
compulsory redeemable on the 31 December 20X9, at C7 each. They bear interest at 12%,
payable annually. The effective interest rate is 17.6319%. These funds are to be used
exclusively for the construction of a head office building.
Construction of the head office began on 1 January 20X5. Junk Limited spent C2 700 000 on
the construction thereof (this was incurred evenly over the period of construction).
Construction was complete and the building was ready for use on the 30 November 20X5.
The useful life of the building was 10 years and the residual value is estimated at Cl 000 000.
Surplus funds from the debenture issue were invested and earned interest of C250 000 (earned
evenly during the year).
The head office is a qualifying asset as defined by IAS 23.
Required:
Provide all the related journal entries for the year ended 20X5. Ignore tax.
Question 23.7
Jellyvog Limited is a company based in Paris. On 1 January 20X8 it began the construction
of a new shopping mall in America.
Details of the progress payments made during 20X8 are as follows:
On 1 January
On 1 April
On 1 July
On 30 September
Costs in $
200 000
300 000
550 000
350000
The construction of the shopping mall (considered to be a qualifying asset) was completed on
30 September 20X8 and it was let out to tenants on the same day.
The construction was financed by a foreign loan of $1.5 million raised on the 1 January 20X8
(raised specifically to finance the mall construction). The interest rate on this loan was 15%
per annum. The loan and related interest was repaid on 31 December 20X8. Surplus funds
were invested in a dollar-denominated call account earning 10% interest per annum. Interest
income on this account accrues annually. The balance in the dollar-denominated call account
was transferred to the companys Euro-denominated call account on 31 December 20X8.
273
Borrowing costs
:>
Jeliyvog Limited uses the Euro as their functional currency. The average Euro/ Dollar
exchange rates during 20X8 were as follows:
Average rates in 20X8:
1 January - 3 1 March
1 April - 30 June
1 July - 30 September
1 October - 31 December
1 January - 31 December
Spot rates in 20X8:
1 January
3 1 March
30 June
30 September
31 December
Euro
Dollar
6.00
4.00
7.00
8.00
6.25
1
1
1
5.00
6.10
3.60
7.20
7.00
1
1
1
1
1
1
1
Required:
a) Calculate the amount of borrowing costs that may be capitaliased to the shopping mall
during the year ended 31 December 20X8.

b) Journalise the above
c) Calculate the amounts to be expensed or included as income in the statement of
comprehensive income for the year ending 31 December 20X8 assuming that the
shopping mall was not considered to be a qualifying asset.
Ignore tax.
Question 23.8
A loan of C500 000 was raised on 1 January 20X5. This loan was raised specifically to fund
the construction of a building (a qualifying asset). Interest of C50 000 is charged on this loan
(10% per annum) and is compounded annually on 31 December.
Interest income of C30 000 was earned evenly during the year. Included in this amount is
C9 000 earned by investing surplus funds from the specific loan in a fixed deposit between
1 July - 30 September.
Construction began on 1 March 20X5 and ended 31 August 20X5.

Construction costs totalled C410 000 during this period.
The building was brought into use on 1 October 20X5. Buildings are depreciated at 10% per
annum, straight-line to a nil residual value.
The company owns only one other item of property, plant and equipment, this being
equipment with a carrying amount of C370000 at 31 December 20X5 (C420000 at
3 1 December 20X4). There have been no disposals, purchases or other movements in
property, plant and equipment other than those that are evident from the information
provided,
11
Borrowing costs
allow interest to be deducted as it is incurred

allow a building allowance of 5% per annum (not apportioned for part of a year)
levy normal income tax at 30% of taxable profits.
There are no other temporary differences other than those evident from the information above.
Required:
a) Calculate the amount of borrowing costs that must be capitalised in terms of IAS 23.
b) Show all related journal entries in 20X5.
c) Provide the following disclosure in the financial statements for the year ended
3 1 December 20X5 in as much detail as is possible:
Statement of comprehensive income

Statement of financial position
Accounting policy note for borrowing costs
Finance charges note
Profit before tax note
Property, plant and equipment note
Deferred tax note
No comparatives are required.
Question 23.9
Loans raised specifically to fund the construction of a building (a qualifying asset):
Loan A (10%) raised 1 January 20X5: C500 000

Loan B ( 15%) raised 1 June 20X5: C400 000
C100 000 of the loan B capital was repaid on 31 July 20X5. No other loan capital was repaid.
Interest was payable (compounded) annually on 3 1 December.
The only interest income earned during the year was interest income earned on the investment
of surplus funds from the specific loans in a 6% interest account. The interest income is not
compounded.
Construction costs paid for as follows:
31 March 20X5: C300 000

31 April 20X5: C100 000
31 July 20X5:0220 000
Commencement date: 1 March 20X5

Cessation date: 31 August 20X5.
Required:
Calculate the amount of borrowing costs that must be capitalised in terms of IAS 23 and
journalise.
275
I
;
Borrowing costs
Question 23.10
Loans specific to fund the construction of a building (a qualifying asset):
>i
Loan A ( 10%) raised 1 January 20X5: C500 000

Loan B (15%) raised 1 June 20X5: C400 000
C100 000 of the loan B capital was repaid on 3 1 July 20X5. No other loan capital was repaid.
Interest was payable annually, compounded on 3 1 December.
Interest is charged/ earned on monthly opening balances.

The only interest income earned during the year was interest income earned on the investment
of surplus funds from the specific loans in a 6% interest account. Interest income is not
compounded.
i
:
:
Construction costs paid for as follows:
1 March 20X5 - 31 August 20X5: C630 000 (paid for evenly during this period)
Commencement date: 1 March 20X5

Cessation date: 31 August 20X5.
Required:
Calculate the amount of borrowing costs that must be capitalised in terms of IAS 23 and
journalise.
Question 23.11
Yipdeedoo Limited began construction on a building, a qualifying asset on 1 March 20X1.
The construction was complete on 30 November 20X1 and brought into use from
1 January 20X2. Depreciation is provided at 10% per annum to a C100 000 residual value.
The company had the following general loans outstanding during the year:
Bank
A Bank
B Bank
C Bank
Loan amount
C300 000
C200 000
C100000
Interest rate
15%
10%
12%
Date loan raised

1 January 20X1
1 April 20X1
1 June 20X1
Date loan repaid

N/A
30 September 20X1
31 December 20X1
The interest on the loans is compounded annually.
Construction costs:
Details
Laying a slab
Waiting for slab to cure
Purchase of materials
Labour costs
Date incurred
1 March 20X1
1 March - 31 March
1 April 20X1
1 April - 30 Nov 20X1
Amount
C60000
CO
C120 000
C330 000
Comments
This is a normal process

Incurred evenly over the
months but paid at the
beginning of each month
Interest income of C30 000 was earned during the year.
Chapter 23
276
Employee benefits
[Part sj
Chapter 25
Employee benefits
Question
25.1
25.2
25.3
25.4
25.5
25.6
25.7
25.8
25.9
Key issues
Short-term compensated absences: journal entries
Defined benefit plan: journal entries
Profit sharing: journal entries
Short-term compensated absences, profit sharing and defined benefit plan:
calculation of the employee benefit expense
Leave pay provision dealing with different conditions relating to these employee
benefits: calculation of the provision
Defined benefit plan: subsidiary ledger; general ledger and disclosure
Defined benefit plan: recognition of actuarial gains/losses directly in profit and
loss account and using corridor approach.
Defined benefit plan: subsidiary ledger; general ledger and disclosure
Employee benefit provisions: calculation
Chapter 25
289
Employee benefits
Question 25.1
Truck Limited is a company involved in the transportation industry. Truck Ltd employs 500
drivers, 50 managers and 10 directors.
Truck drivers work long hours, often driving through the night to ensure that Truck Limiteds
reputation of always being on time is maintained. As a result, truck drivers are rewarded with
40 days leave per year (more than other staff members). On average truck drivers earn
123 000 per annum.
The managers work in shifts and are comfortably accommodated at their office near the
business premises. Managers are granted 30 days leave and earn an average of C212 000 per
annum.
The directors are an integral part of the company, and as a result, are of the opinion that they
periods of time. Consequently, each director only
receives 20 days of leave per year. All the directors earn an annual income of C500 000.
cannot be away from work for extended
Leave accruing to an employee during any given year, must be taken by the end of the next
financial year or it will be forfeited. Leave may not be converted into cash.
Truck Limited operates on a 5 day working week. The year ended 31 December 20X6 has
365 days.
On 31 December 20X6, the following information was available:
Average unused
days
Number of
employees
expected to leave
in next financial
year
Drivers
Managers
Directors
10
7
5
50
3
Average number of
days that will be
taken in next
financial year *
3
2
Employees are expected to leave early in 20X7 and will not take their leave.
Required:
a) Determine the provision that would need to be raised for each type of employee.
b) Journalise the entries that would be necessary to account for paid vacation leave for the
Question 25.2
Cabrio Limited is involved in manufacturing gizmos (these are the parts used in convertibles
that dlow the roof to open and close). Cabrio Limited has approximately 1 000 employees, all
of w >iom are covered by the companys defined benefit pension plan.
Chapter 25
290
fi
f :v.
m
'
II
Employee benefits
The following information pertains to this pension plan:
Plan assets: 1 January 20X6

Plan obligation: 1 January 20X6
Current service costs
Contributions paid during the year
Expected return on plan assets
Discount rate
Unrecognised actuarial loss: 1 January 20X6
Benefits paid to members during the year
Plan assets: fair value at 3 1 December 20X6
Plan obligation: present value at 31 December 20X6
C
300 000
400 000
100000
200 000
10%
15%
55 000
100 000
400 000
500 000
Employees are expected to work for an average of 15 years at Cabrio Limited.

Cabrio Limited utilises the corridor approach (described in IAS 19) to account for its
unrecognised actuarial gains and losses.
Required:
Prepare the journal entries to account for the defined benefit plan in terms of the requirements
set out in IAS 19.
Question 25.3
Futon Limited is a company involved in the retailing of sleeper couches. Futon Limiteds
staff complement comprises of 40 sales representatives.
Each year the sales representatives are given a gross profit target to meet. If the sales
representatives surpass the target, 20% of the amount above the target is distributed to them as
a bonus. The only conditions are that the sales representatives must remain employed for the
entire year in which the profit was attained and remain with Futon Limited until the end of the
financial year after the year in which the profit was attained.
The target for the year ended 31 December 20X3 was a gross profit of Cl 000 000. The sales
representatives managed to double this target.
Employment statistics reflect that:
all employees work for Futon for at least 2 years; and
an average of 10% of staff members leave annually and are replaced by new staff
members.
Required:
a) Calculate the provision that needs to be raised at 3 1 December 20X3.
b) Journalise the raising of the provision.
Chanter 25
291
Employee benefits
Question 25.4
Tigger Limited is a company that is involved in the tourism industry. Tigger Limited
specialises in overnight game drives. The directors of Tigger Limited believe that the most
important asset in any company is the employees of the company. As such they have a
number of benefits for their employees.
Vacation leave:
All staff members are entitled to 20 days of paid leave annually.
This leave can accumulate indefinitely, but is forfeited when an employee leaves the
company. The leave may never be converted to cash.
In total, there are a total of 320 leaves days outstanding at 31 December 20X6, which
were earned in the current year.
However, 10 staff members will be leaving on 2 January 20X7. Their leave details are as
follows:
o
o
On 31 December 20X5: a total of 20 days leave was due to them.

On 3 1 December 20X6: a total of 40 days leave due to them.
Bonuses:
Every year Tigger Limited pays out 10% of their profit to its employees.
The profit is
shared amongst the number of employees employed at year-end.
The only condition is the employee had to be employed at Tigger Limited for the entire
year. If an employee is not employed for the entire year, he forfeits his share of the profit.
The forfeited profit is not distributed amongst the other employees.
Employees are very loyal to the company with employees spending a minimum of 5 years
with the company.
On 26 July 20X6, Tigger Limited hired 5 new employees. No employees left during the
current year.
The profit for the year ended 3 1 December 20X6 was C5 000 000.
Defined benefit plan:
Details of the defined benefit pension plan during 20X6:

Current service cost
Benefits paid to members
Return on plan assets
Contributions paid to the fund
Finance charges on plan obligation
Actuarial gain realised during the year
C
250 000
500 000
50 000
400 000
90 000
10 000
General:
At year end Tigger Limited had a total staff complement of 80 employees
Chapter 25
292
v.
L.
The average annual salary is C250 000.
There are 250 working days in a year.
Employee benefits
Required:
Calculate the amount that will be charged to staff costs (employee benefit expense) in the
statement of comprehensive income.
Question 25.5
Tiff Limited has a 31 December year end. Employees work a 5 day week.
Each employee is entitled to 20 paid working days of vacation per annum.

Employee statistics are as follows:
Number of employees
Average annual salary: 20X5
Unused leave 31/12/20X5
Leave taken in the year ended 31/12/20X6:
S1&S2: on average, 9 earned in 20X6, 5 earned in 20X5
S3: all earned in 20X6
Forecasted leave to be taken during 31/12/20X7:
S1&S2: on average, 12 earned in 20X7, 3 earned in 20X6
S3: all earned in 20X7
50 000
C100 000
10 days
14 days
15 days
No employees left or joined the company in the past 2 years.
Salaries increased by 20% on the 1/1/20X6.

Past estimates show that management is able to correctly forecast the number of vacation
days that will be used in the following financial year.
Required:
Determine the leave pay provision at the 31 December 20X6 assuming that:
a) scenario 1: leave accumulates and vests indefinitely.
b) scenario 2: leave accumulates for one year after it accrues but is non-vesting.
c) scenario 3: leave does not accumulate and is non-vesting.
Phanter 25
293
Employee benefits
Question 25.6
The following details relate to Ryan Limiteds defined benefit pension fund:
C
!:
Fair value of plan assets (1/1/20X6)

Fair value of the plan assets (31/12/20X6)
Present value of the plan obligation (1/1/20X6)
Present value of the plan obligation (31/12/20X6)
Unrecognised past service costs (1/1/20X6; vesting on the 31/12/20X9)
Current service costs (accrues evenly)
Payments made to the fund (30/6/20X6)
Benefits paid by the fund (30/6/20X6)
Unrecognised actuarial gains (1/1/20X6)
Expected return on plan assets (1/1/20X6)

Expected return on plan assets (31/12/20X6)
Rate on long term high quality bonds (1/1/20X6)
Rate on long term high quality bonds (31/12/20X6)
Average remaining working life of employees
6 000 000
6 500 000
(7 000 000)
(7 600 000)
400 000
1 500000
I 000 000
(1 100 000)
(750 000)
12%
15%
10%
12%
10 years
1
Ryan Limited wishes to use the corridor provisions in IAS 19 to minimise the impact of
actuarial gains and losses on the statement of comprehensive income.
Required
a) Show all ledger accounts related to this defined benefit plan in the pension fund
subsidiary ledger of Ryan Limited for the year ended 31 December 20X6.
b) Show the pension fund liability (or asset) account in the general ledger of Ryan Limited
for the year ended 3 1 December 20X6.
c) Prepare the related notes to the financial statements of Ryan Limited for the year ended
3 1 December 20X6 in accordance with IFRSs.

:
Question 25.7
The details for the year ended 3 1 December 20X8 relating to the defined benefit plan that an
entity provided for its employees are as follows:
PV of obligation at 31 December 20X7

Fair Value of assets at 31 December 20X7
Current Service Cost
Discount rate at 3 1 December 20X7
Expected return on plan assets at 3 1 December 20X7
Contributions made to fund
Benefits paid by the fund
Average remaining working life of employees
Fair value of plan assets at 3 1 December 20X8
PV of plan obligation at 31 December 20X8
700 000
1000000
295 000
11.5 %
12%
300 000
450 000
10 years
1 100 000
795 000
In the year ended 31 December 20X7 existing benefits were reduced. The balance on the
unrecognised past service cost account at 31 December 20X7 was C150 000. This
remaining amount (C150 000) will vest over the next 3 years.
Chapter 25
294

Employee benefits
Required
a) Calculate the employee benefit expense line item in the statement of comprehensive
income for the year ended 31 December 20X8 assuming that actuarial gains/losses are
recognised directly in profit and loss.

b) Calculate the following as at 31 December 20X8 assuming that the IAS 19 corridor
approach is used and that the balance on the unrecognised actuarial loss at
31 December 20X7 is C200 000:
The total in the employee benefit expense account
The balance on the unrecognised actuarial gains/ losses account (asset or liability).
i:
Question 25,8
The information given below relates to the annual salary package of an employee of your
business for the year ended 29 February 2008:
Gross Salary
contributions (contributions by employee)
Pension Fund contributions (contributions by employee)
Employees tax
Workers Union Subscription (contributions by employee)
Medical Aid contributions (contributions by employee)
Salary owing to employee
C
150 000
(3 000)
(15 000)
(33 000)
(1 000)
(7 000)
91000
Additional Information:
The employee works as a sales representative. He is entitled to a bonus of 10% of the
gross profit of sales contracts which he arranged during the year according to a formal
clause in his employment contract. The total value of all sales contracts he has organized
during his 5 year employment is C5.5 mil (cost = C4.4 mil) W'hile the value of sales
arranged during the current year is Cl.2 mil (cost = C0.9 mil).
The business contributed on a 1:1 basis for medical aid and C7 500 to the pension fund
for the employees benefit.
The business has an efficient Personnel Department that administers all deductions for all
employees, paying all contributions the day after the salary is incurred.
The employee is entitled to the standard 15 days holiday leave. This leave accumulates
for one year, after which it is forfeited. It is unable to be paid out in cash upon
resignation/retirement/retrenchment.
The employee has the following leave outstanding at 28 February 20X8:
Year ended 20X6 - 5 days

It was expected, at 28 February 20X8, that he would use all of this leave still due
sometime in April 20X8.
Chapter 25
to
him
295
Employee benefits
As expected, this employee took leave in April 20X8, using up the maximum amount of
past leave that was due to him.
His monthly salary for the year ended 28 February 20X9 has remained the same as that
for the year ended 28 February 20X8.
His tax was assessed to be C35 000 for year ended 28 February 20X8 (the tax authorities
posted his tax assessment to the companys address and was received 30 April 20X8).
Assume that employees tax was the only tax paid by the employee.
The appropriate discount rate is 12%
Required
a) Briefly discuss the main category of employee benefit apparent from the question above.
Also list any sub-categories evident in the question above.
b) Prepare the journal entries in the records of the business for the year ended
28 February 20X8.
Note: Process the salary journal for the year as one entry and not 12 separate monthly
entries. Do the same for the cash payment to employee and relevant authorities.
c) Prepare the journal entries for the utilisation of the leave as well as any salary expense
(but not employer contributions) for April 20X8.
Question 25.9
You are the financial manager of Chemco Ltd, a company which researches generic
medicines. One of your duties involves dealing with any aspects of IAS 19. You have the
following information available to you for the year ended 31 December 20X8:
Leave Pay:
Type Of
Employee
Gross
Salary per
year
Number of
Employees
Maximum
Leave
Allowed per
year (days)
Directors
Technicians
Office personnel
C350 000
C180 000
C110 000
20
18
16
55
25
Maximum
Leave
Leave Allowet Taken in
to Carry
Current
Forward
Year (days)
(days)
15
4
13
11
10
II
The company policy is that all leave is accumulating for 1 year but is non-vesting.
Experience indicates that only 40% of the directors will use the past leave due to them,
while technicians and office personnel still employed in 20X9 will use 90%.
5 laboratory workers resigned with effect fromIJanuary 20X9. No other employees are
expected to resign.
Chapter 25
296
Employee benefits
Maternity Leave:
Chemco has the following number of female employees (included in the number of
employees above): 6 directors, 20 laboratory workers and 16 office employees.
Female employees are allowed 90 days paid maternity leave per annum.
This leave is non-accumulating and is unable to be paid out in cash if not taken.
Required:
Calculate the leave pay and maternity provisions for the year ended 31 December 20X8.
Chapter 25
297
it
[Part 5|
Chapter 26
26.1
26.2
26.3
Key issues
Revaluation of depreciable asset with change in estimate of useful life
Share issue, sale of depreciable asset, tax computation, deferred tax
Journal entries and disclosure of property, plant and equipment, tax and deferred
26.4
Debentures, EPS, tax computation, redemption of preference shares, share issue,
Question
tax
26.5
26.6
26.7
deferred tax, post reporting period events

Expropriation of depreciable asset, impairment of depreciable asset, tax
computation, deferred tax
Separately disclosable items, calculation of tax and deferred tax
Recognition of separate components, decision to expense or capitalise, increase
in provision for dismantling costs through unwinding of discount
Chapter 26
'299
Question 26,1
Espresso Limited is a company in the food and beverage industry. The year-end of the
company is 31 December. The company purchased its only item of plant and equipment on
1 January 20X2 at a cost of C250 000. Plant and equipment is depreciated on the straight line
basis over its useful life of ten years. There is no residual value. The allowance granted by
the tax authorities is 20% per annum on the straight line basis.
The plant and equipment was revalued for the first time on 1 January 20X6
replacement cost of C240 000. The residual value remained unchanged.
to a net
When preparing the financial statements for the year ended 31 December 20X6, the total
estimated useful life was reassessed from ten years to twelve years. Espresso Limited
accounts for changes in estimate using the re-allocation method and has a policy of
transferring the revaluation surplus to retained earnings as the asset is used. The normal
company tax rate is 29%.
Required:
a) To prepare the following notes to the financial statements of Espresso Limited for the year
ended 3 1 December 20X6:
Accounting policy for plant and equipment
The plant and equipment note
The deferred tax note
The change in accounting estimate note
b) To prepare an extract from the statement of changes in equity of Espresso Limited for the
year ended 31 December 20X6, showing only the revaluation surplus column.
Chapter 26
300
m
1
;>
Question 26.2
Technowiz Limited is a listed company involved in manufacturing specialised accessories for the
computer industry such as a cordless keyboard and mouse, a docking station and digital pen.
The trial balance of Technowiz at 30 September 20X8 is presented below:
TECHNOWIZ LIMITED
TRIAL BALANCE
AT 30 SEPTEMBER 20X8
Debit
Ordinary share capital (1 000 000 shares)
Share Premium
12% Preference share capital
Loan from bank
Deferred tax (30/9/X7)
Retained earnings (30/9/X7)
Gross profit
Operating expenses
Land and buildings
Accumulated depreciation - buildings (30/9/X7)
Equipment
Accumulated depreciation -equipment (30/9/X7)
Motor vehicles
Accumulated depreciation - motor vehicles (30/9/X7)
Investment in Data (Private) Ltd
Loan to Data (Private) Ltd
Inventory
Accounts receivable
Bank
Accounts payable
Dividends paid
Credit
1 000 000
1 060 000
200 000
600 000
79 200
126 200
1 509 140
800 000
2 600 000
218 750
1 175 000
396 000
530 000
235 000
60 000
33 000
68 750
51 200
113 550
49 210
42 000
5 473 500
5 473 500
Authorised share capital comprises 1 200 000 ordinary shares of par value Cl and
400 000 non-redeemable preference shares of C0.50 each.
The preference shares were issued on 30 June 20X6. Dividends are payable half yearly.
On 1 January 20X8 the company had a rights issue of 1 share for every 3 ordinary shares
held at C2.75 per share. An extract from the minutes of the AGM reads as follows:
"Approved the granting of unconditional authority to the directors to issue up to 200 000
shares at any time before the next AGM"
The loan bears interest at the prime lending rate less 2% which is payable annually in
arrears on 1 October. During the current year the prime rate was as follows:
1/10/X7 - 30/6/X8
1/7/X8 - 30/9/X8
30/9/X8
18%
20%
21%
The loan is repayable in full on 30 September 20Y1 and is secured over land.
Chapter 26
301
* Land is not depreciated. Buildings are depreciated at 2% p.a. on cost, which is equal to
the allowance granted by the tax authorities. Land and buildings comprise a factory
situated on stand 674 Edenvale township. The land was purchased on 1 September 20X0
and a factory was constructed thereon at a cost of Cl 750 000. The factory was
completed and brought into use on 30 June 20X 1. No land was bought or sold during the
year.
Equipment is depreciated on the straight line basis at 20% p.a. The tax authorities grant
an allowance of 33.3% per year on cost. The allowance is not apportioned over time.
On 1 January 20X8 new equipment was purchased at a cost of C185 000. This is the first
addition to the existing equipment since it was purchased.
At the end of the year management identified certain equipment whose market value had
declined significantly, due to major technological advances. According to the
management accountant's depreciation schedules, the equipment had a carrying amount of
C66 000 on 30 September 20X8. The net selling price was estimated at C40 000 and the
vaiue in use was calculated to be 35 000. No entries have been processed to account for
the decline in value.
There were no sales of equipment during the year.
Motor vehicles are depreciated at 25 % p.a. on cost, which is equal to the wear and tear
allowance granted by the tax authorities. All the motor vehicles (other than the new
delivery van mentioned below), were purchased on 1 October 20X5.
On 30 November 20X7, a delivery van was involved in an accident and written-off by the
insurance company. The cost price of the van was C60 000. The insurance company
paid out C20 750 in terms of the claim and the bookkeeper journalised it as follows:
Debit
Bank
Loss on disposal
Motor vehicles
Credit
20 750
39 250
60 000
A new delivery van was purchased on 28 February 20X8 at a cost of C120 000.
Details of the investment in Data (Private) Ltd are as follows:
30 000 shares at C2 each were purchased in Data (Private) Ltd on 1 August 20X7. Data
(Private) Ltd has a total of 40 000 shares in issue. The loan was advanced on 30
September 20X8. The directors consider the shares in Data (Private) Ltd to be worth
60 000.
Inventory is accounted for on the weighted average method, and is sold at a mark-up of
50% on cost. Finished goods with a cost of C48 000 were written down to their net
realisable value of 36 000 on 30 September 20X8. The write down is included in net
operating profit. The carrying amount at 30 September 20X8 comprises:
Raw materials
Work-in-progress
Finished goods
15 150
12 600
41 000
;
Chapter 26
302
Ig
An interim dividend of C0.03 per ordinary share and the interim preference dividend were
paid on 31 March 20X8. The directors declared the final preference dividend and a final
ordinary dividend of C0.04 per share on 30 September 20X8. These dividends declared
have not yet been recorded.

Required:
a) Prepare the statement of changes in equity of Technowiz Ltd for the year ended
30 September 20X8
b) Prepare the accounting policies and notes relevant to the statement of changes in equity
and statement of financial position.
Your presentation must be in accordance with the International Financial Reporting Standards.
)
All workings must be shown.
Question 26.3
The following is the complete and correct 20X6 deferred tax calculation relating to Tissot
Limited.
01/01/20X6
01/01/20X6
400 000
10 000
Taxbase
480 000
0
31/12/20X6
31/12/20X6
20X6
(12 500)
(25 000)
(60 000)
(10 000)
(15 000)
(40 000)
31/12/20X6
312 500
1/1/20X6
20X6
31/12/20X6
20 000
(20 000)
Rent income received in advance

1/1/20X6
Balance
20X6
Movement
31/12/20X6
Balance
0
(15 000)
Property, plant and

equipment
Balance
Revaluation surplus
Depreciation on buildings
Sale of a building
Balance
Telephone prepaid
Balance
Movement
Balance
Carrying
amount
_(15 000)
Temporary
differences
80 000
Deferred
tax at 30 %
24 000
(10 000)
(3 000)
2 500
10 000
20 000
750
3 000
6 000
415 000
102 500
30 750
0
0
0
(20 000)
20 000
(6 000) L
0
0
0
15 000
15 000
6 000
0
0
4 500
4 500
There are no other permanent or temporary differences other than those evident from the
The company owns only an item of factory plant and buildings:
Chapter 26
303
At I January 20X6 plant had a carrying amount of C40 000, (cost of C100 000 and
accumulated depreciation of C60 000) and a remaining useful life of four years as at
1 January 20X6.
i!
|
Plant is measured on the revaluation model: plant is revalued to fair value every three
years, the valuation on 1 January 20X6 being its first revaluation. The net replacement
value method to account for revaluations of its plant.
Buildings are measured on the cost model.
At 1 January 20X6, buildings had a carrying amount of C360 000, (cost of C500 000 and
accumulated depreciation of CI40 000).
A building, which had cost C200 000, was sold for C300 000 on 1 May 20X6.
The company transfers the maximum from the revaluation surplus to retained earnings on
an annual basis.
Tissot Limited had a total equity of C445 000 at 1 January 20X6, comprising share capital
of C210 000 and retained earnings of C235 000. There was no movement of share capital
during 20X6.
The profit for the period has been correctly calculated at Cl97 000 and dividends of
07 000 were declared on 29 December 20X6.
Required:
a) Prepare all journal entries relating to property, plant and equipment, expenses prepaid,
income received in advance and deferred tax that would have been processed during the
b) Prepare, in conformity with International Financial Reporting Standards, the following
notes for inclusion in the financial statements of Tissot Limited for the year ended
31 December 20X6:
Deferred tax.

:
c) Prepare, in conformity with International Financial Reporting Standards, the Statement of
Changes in Equity of Tissot Limited for the year ended 31 December 20X6.
Chapter 26
304
.
Question 26.4
Woden Limited is a company listed on the Karachi Stock Exchange that distributes and sells a
variety of components and devices designed to protect electrical equipment against thunder and
lightning storms. The statement of financial position of Woden Limited at 28 February-' 20X1
appeared as follows:
WODEN LIMITED
AS AT 28 FEBRUARY 20X1
C
ASSETS
Non-current assets
Land and buildings
- At cost
- Accumulated depreciation
Plant and equipment
- At cost
- Accumulated depreciation
2 400 000
2 200000
(400 000)
750 000
(150 000)
268 790
182 200
1 200
85 390
Current assets
Accounts receivable
Current tax receivable
Bank
2 668 790
2 030450
1 000 000
20000
400 000
610450

Share premium
Retained earnings
10% Debentures
Deferred taxation
517 006
487 006
30 000
Current liabilities
Accounts payable
Debenture interest accrued
121 334
118 608
2 726
2 668 790
The draft profit before interest and tax for the year ended 28 February 20X2 amounted to
C263 763. This amount excludes the premium on redemption of preference shares and
the share issue expenses (see below) as well as the finance costs (see below). Ail other
operating expenses have been accounted for.
Chapter 26
305
The land and buildings are depreciated by an amount of C200 000 per annum. This is
equal to the allowance granted by the tax authorities. The land and buildings were
revalued at 28 February 20X2 by a member of the institute of valuers at a fair value of
C2 000 000. There is no intention to sell the land and buildings. The value of the land is
not material.
The plant and equipment was purchased on 1 March 20X0. The company depreciates its
plant at 20% per annum on the straight line basis. The tax authorities grant a tax
allowance of 33.3% per annum on the straight line basis.
The authorised share capital comprises 200 000 ordinary shares of CIO each and 50 000
12% redeemable preference shares of CIO each.
The preference shares were issued on 1 June 19W9. 30 000 shares are redeemable at the
option of the company on 31 May 20X1 and the balance on 31 May 20X5.
The directors decided to exercise the option and redeem 30 000 preference shares on
31 May 20X1 at a premium of 2.5%. The premium on redemption was provided for in
terms of the issue and is embodied in the companys articles of association. To provide
for the redemption, 8 000 ordinary shares were issued at Cll per share. Share issue
expenses of C4 000 were incurred.
The preference dividend relating to the preference shares redeemed was paid at the date of
redemption. The preference dividend on the remaining preference shares was paid at the
end of the financial year.
The 10% debentures comprise 50 000 10% secured debentures of CIO each issued at a
discount of 5% on 1 September 19W8. The debentures are to be redeemed at a premium
of 10% on 31 August 20X8. The debentures are secured over the property of the
company.
The financial accountant calculated the effective interest rate at 11.4502754% and has
correctly prepared the following amortisation table relating to the debentures:
Balance
Date
01/09/W8
31/08AV9
31/08/X0
31/08/Xl
31/08/X2
31/08/X3
3 1/08/X4
31/08/X5
31/08/X6
3 1/08/X7
3 1/08/X8
Effective
Interest
interest
50 000
50 000
50 000
50 000
50 000
50 000
50 000
50 000
50 000
50 000
54 389
54 891
55 451
56 076
56 771
57 547
58411
59 374
60 447
61 643
Premium Discount Premium Discount
PV
%
2 926
3 261
3 634
4 050
4 514
5 031
5 607
6 249
6 965
7 762
Chapter 26
1 463
1 630
1 817
2 025
2 257
2516
2 804
3 125
3 482
3 881
2 926
6 187
9 821
13 871
18 386
23 417
29 024
35273
42 238
50 000
25 000
23 537
21 907
20 090
18 064
15 807
13 292
10 488
7 364
3 881
0
475 000
479 389
484 280
489 731
495 807
502 578
510 125
518 536
527 909
538 356
550 000
306
f
f
I
On 28 February 20X2, the directors declared a capitalisation issue of one ordinary share
for every two held to all ordinary shareholders registered on that date.
On 21 March 20X2, at a meeting of directors to approve the financial statements, the
directors declared an ordinary dividend of CO. 10 per share for the year ended 28 February
20X2.
In accounting for
ail of the above share transactions, the directors wish

distributable reserves at the maximum amount possible.
to maintain
On 25 June 20X1, the tax assessment for the year ending 28 February 20X1 was received.
This showed an amount of assessed normal tax on taxable profit of C30 200 for that year.
An amount of C27 300 was provided in the 20X1 financial statements. The balance
owing to the tax authorities was paid on 31 August 20X1, together with the first
provisional payment for the 20X2 year of 04 700. The second provisional payment for
the 20X2 year of C15 300 was paid on 28 February 20X2.
The applicable tax rate is 30% .
Required:
a) Prepare the statement of comprehensive income of Woden Limited for the year ended 28
February 20X2 in compliance with International Financial Reporting Standards. Start

with Profit before interest and tax.
b) Prepare the statement of changes in equity of Woden Limited for the year ended
28 February 20X2.
c) Prepare the following notes to the financial statements at 28 February 20X2 in
compliance with International Financial Reporting Standards:
* Taxation
Deferred taxation
Earnings per share
Debenture liability
Post reporting period events

i,
Comparatives are not required (except for the earnings per share note).
Chapter 26
307
Question 26.5
Coultread Cars Limited manufactures luxury cars. The companys financial year end is
31 March.
The following balances have been extracted from the general ledger at 3 1 March 20X0:
Debit
Land
Factory buildings
Plant and machinery
Accumulated depreciation - factory buildings
Accumulated depreciation - plant and machinery
Deferred tax
Current tax payable
Dividends paid
Taxation expense
Credit
400000
630 000
850 000
189 000
510000
168 000
65 175
4 400
20 000
67 540
The income tax expense at 31 March 20X0 comprises:

C
50400
14 640
65 040
Current tax
Deferred tax
The tax assessment in respect of the 31 March 20X0 year end, received on 10 May 20X0,
reflected an assessed tax of C51 900. A provisional payment was made on 30 June 20X0.
Provisional payments made during the year ended 3 1 March 20X0 totalled R46 000.
The following provisional payments were made during the year:

C
23 000
28 900
30/09/20X0
31/03/20X1
On 31 August 20X0 the government expropriated all the land on which all the factory
buildings were situated in the Northern Province. An amount of Cl 200 000 (land:
C650 000 and factory buildings: C550 000) was received in compensation on
11 November 20X0. The following journal entry was recorded on receipt of the
compensation:
Debit
Credit
1 200 000
Bank
1 200000
Compensation received
No other entries have been processed in respect of the expropriation. No land has
previously been expropriated by the government in this area.
Chapter 26
ins
The factory building was built and brought into use on 1 October 19X2 and has been
depreciated on the straight-line method based on an estimated useful life of 25 years. The
tax authorities have granted an annual building allowance of 5% p.a. on cost. This
allowance is apportioned for time. The tax authorities have indicated that the
compensation in respect of the land is not taxable.
The directors decided to rent a factory for the next two years until they find a suitable
factory to purchase or build.
Due to competition in the luxury car market, it has become necessary for the company to
begin manufacturing its new model Prido in July 20X1 instead of September 20X2. As a
result 25% of the existing plant and machinery will become obsolete and be scrapped on
30 June 20X1. Management have obtained a quotation for the scrap value of this plant
and machinery amounting to C18 250 at 31 March 20X1. This plant will not be used
after 31 March 20X1. No entries have been made to account for this information.
Plant and machinery is depreciated on the straight line method at a rate of 15% per annum
and an allowance of 20% p.a. on cost has been granted by the tax authorities. This
allowance is not apportioned for time.
Profit before depreciation and taxation for the year ended 31 March 20X1 amounted to
C398 600 and includes dividends received of C15 000. An interim dividend of CIO 000
was paid on 30 September 20X0. No final dividend has been declared or proposed.
The applicable tax rates for both years is 30%

Assume dividend income is exempt from tax.
Required:
To the extent that the information allows, prepare the statement of comprehensive income,
statement of financial position and notes to the financial statements of Coultread Cars Limited
for the year ended 31 March 20X1, in compliance with International Financial Reporting
Standards.
Comparative figures are not required.
Question 26.6
Ace of Spades (Private) Limited manufactures spades in Karachi. The following balances
appeared in the trial balance at 31 March 20X8:
Debit
(Credit)
C
(92400)
(3 500)
(568 500)
193 725
125 000
Deferred tax
Current tax payable
Profit before tax
Income tax expense
Dividends
Chapter 26
309

'
The balance on deferred taxation at 31 March 20X7 was a liability of C58 800.
On 15 July 20X8 the bookkeeper received the tax assessment for the 20X8 year of
assessment, amounting to C165 000. The bookkeeper then paid the shortfall of C8 375 to the
tax authorities and processed the following entry only:
Debit
8 375
Current tax payable

Bank
Credit
8 375
Provisional tax payments made during the year:

30 September 20X8
31 March 20X9
C84 250
C59 350
On 31 January 20X9 an earthquake occurred in Karachi that measured 4.9 on the Richter
scale. Earthquakes have never occurred previously in this area. As a result of the earthquake
the whole factory collapsed and the plant and machinery was destroyed.
The factory building was rented and the lessor bore the loss of the factory building.
The plant and machinery was originally purchased on 30 September 20X6 at a cost of
C720 000. The companys policy is to depreciate plant and machinery at 20% p.a. on cost.
The tax authorities have allowed an allowance of 33.33% on the machinery (this allowance is
not apportioned). The plant and machinery was not insured and the loss has been accounted
for in the profit before taxation for the year.
On 1 March 20X9 the company purchased new plant and machinery, which it brought into
use in another rented factory. This new plant and machinery cost C810 000 and management
considers it to have a useful life of 5 years and no residual value. The tax authorities have
granted an allowance of 33.33% (this allowance is not apportioned).
Profit before taxation for the year ended 31 March 20X9 amounted to C376 400 and includes
the effects of the earthquake.
Dividends received during the year amounted to C18 600.
The directors declared an ordinary dividend of C90 000 for the year ended 31 March 20X9.

The company provides for deferred tax on the comprehensive basis. The applicable tax rates
are:
Normal company tax
35.0%.
Required:
Prepare extracts from the statement of financial position at 31 March 20X9, the statement of
comprehensive income for the year ended 31 March 20X9 and the notes to the financial
statements of Ace of Spades (Private) Limited, in accordance with International Financial
The notes in respect ofproperty, plant and equipment are not required,
Comparatives and accounting policies are required.
Chapter 26
310
Question 26.7
Blue Tide Ltd owns a nuclear power plant, purchased on 1 July 20X1. There is an obligation
to dismantle the plant after 5 years. A condition to the continued use of the nuclear plant is a
safety inspection once every 2 years. The 20X1 inspection had already been performed (on
2 January 20X1) and been paid for by the seller of the plant. The cost of this inspection is
therefore built in to the price that Blue Tide Ltd paid for the plant. The next inspection is
scheduled for 2 January 20X3.
C
Description of components:
Price paid for nuclear plant (an estimated 20% of this amount relates to the 20X1 8 000 000
safety inspection and the balance to the physical structure)
453 942
Present value of future dismantling costs (discounted at a rate of 12%)
Significant costs incurred subsequent to the purchase of the nuclear plant are listed below:
Transaction
date
Repair of central shaft and installation of a new part (it is

estimated that 40% of the invoice relates to the new part as
opposed to the repair). The new part is expected to result in
a 20% increase in power output, although the remaining
useful life of the related plant will remain the same. The
new part is expected to have a nil residual value.
Major inspection
1 July 20X2
2 January
20X3
500000
1500000
The nuclear plant was ready for use from 1 July 20X1 but was only brought into use on
1 August 20X1.
The physical structure of the nuclear plant is to be depreciated over five years to a
residual value of C400 000.
The nuclear plant must be dismantled on 30 June 20X6.
The company uses the straight-line method to calculate depreciation.
Required:
a) Show all related journal entries relating to the nuclear plant for the year ended
31 December 20X1, 20X2 and 20X3.. .
b) Disclose the nuclear plant in the property, plant and equipment note in the financial
statements of Blue Tide Ltd for the year ended 31 December 20X3.
Round to the nearest Cl.

Ignore effects of taxation.
Chapter 26
311
[Part 51
Chapter 27
Question
Key issues
27.1
27.2
27.3
Government grant to subsidise expenses

Government grant to subsidise acquisition of an asset
Government grant to subsidise the acquisition of an asset and for immediate
financial support
Repayment of grant
Government grant in the form of an asset and government assistance: journals
and disclosure
Government subsidy: discussion
Government grant: conditions not met and had to be repaid: change in estimate:
journals
27.4
27.5
27.6
27.7
Chanter 21
313
Question 27.1
Tukumu Limited is a company that manufactures curios. Tukumu Limited operates in the
Natal Midlands and employs the local population to manufacture the curios.
As a result of the positive effect that Tukumu Limited has had on an otherwise impoverished
area, it was awarded a government grant of C 150 000 on 1 January 20X6. This grant was
given to Tukumu Limited to subsidise 20% of future wages.
Tukumu Limited had complied with all the conditions laid out to obtain the grant during the
previous financial year (20X5). The only condition that remained on 1 January 20X6 is to
incur future wages.
Wages incurred and paid:

3 1 December 20X6
3 1 December 20X7
31 December 20X8
C
200 000
250 000
400 000
Required:
a) Show the journal entries in the companys general journal, for the years ended
31 December 20X6 to 20X8, assuming that the company policy is to present such a grant
as grant income.
b) Show the journal entries in the companys general journal, for the years ended
31 December 20X6 to 20X8, assuming that the company policy is to recognise
government grants as an adjustment to expenses.
Question 27.2
Dozey Limited manufactures and sells toys for babies. They have been operating a profitable
business for many years in the Amakanda area.
baby boom, Dozey Limited found it needed to purchase new equipment. At

the time, the directors discovered that the government was allocating grants to manufacturing
companies operating in the Amakanda area. Dozey Limiteds directors applied for a grant.
Due
to a recent
On I January 20X5, Dozey Limited was awarded a grant of C 400 000 to purchase the much
needed equipment. Dozey Limited had met all the conditions of the grant by 31 December
20X4, apart from the actual acquisition of the equipment. Dozey Limited purchased the
equipment immediately on receipt of the grant (1 January 20X5).
The cost of acquiring the equipment was C 1 500 000. The useful life is expected to be 4
years. Dozey Limited does not expect to receive any amount for the equipment at the end of
its useful life.
Required:
a) Show the general journal entries in the years ended 31 December 20X5, 20X6, 20X7 and
20X8. The company has the policy of recognising government grants directly in income.
b) Show the general journal entries in the years ended 31 December 20X5, 20X6, 20X7 and
20X8. The company has the policy of recognising government grants indirectly in
income.
Chapter 27
314
Question 27.3
Potato Limited is a company that farms corn. Potato Limited is a relatively new company in
the corn industry, having previously been in the gun manufacturing industry.
Potato Limited was awarded a government grant of C 500 000 on 1 January 20X5, the details
of which are as follows:
C 300 000 is to assist with the purchase of a new harvester;
C 200 000 is for immediate financial support and is not associated with any future costs;
AM conditions attaching to the grant have been met.
Later that day, the harvester was acquired for C 900 000. The harvester has a useful life of 5
years and, at the end of its useful life, Potato Limited expects to sell it for C 50 000 as scrap
metal.
Required:
a) Show the general journal entries for the years ended 3 1 December 20X5 to 20X9 using
the direct method (recognised as grant income).
b) Show the general journal entries for the years ended 31 December 20X5 to 20X9 using
the indirect method (recognised as a reduction of the related costs).
Question 27.4
Blot Limited is a newly formed company that is considering entering the ink business. Blot
plans to manufacture ink and sell it to printers.
Due to the scarcity of businesses in the sector, Blot Limited was awarded a government grant
to purchase the machinery it needed to start operations.
The grant was awarded to Blot Limited on 1 January' 20X6 for an amount of C 250 000 and is
conditional upon Blot manufacturing ink for an unbroken period of 3 years. Should Blot stop
manufacturing before the end of the 3 year period, the grant will have to be repaid in full.
Blot Limited purchased the requisite machinery on 1 January 20X6 for C 500 000. The
machinery is expected to have a useful life of 4 years and a nil residual value.
Due to unforeseen circumstances, Blot Limited had to stop manufacturing ink on 1 January
20X8, but intends to continue on 1 January 20X9.
Required
a) Show the general journal entries for the years ended 3 1 December 20X6 to 20X9 using
the direct method (recognised as grant income).
b) Show' the general journal entries for the years ended 3 1 December 20X6 to 20X9 using
the indirect method (recognised as a reduction of the related costs).
Chapter 27
315
Question 27.5
Anthony Limited wanted to start manufacturing guns and weapons. To do this they were
required to obtain a license from the government. The company applied for a license and was
awarded one on the 30 June 20X8. The fair value of the grant is reliably determined to be
worth C 900 000, and has to be renewed for this amount in 5 years time. The company had to
pay the government C 50 000 to obtain the licence.
The company was also given free technical advice by government experts on the
manufacturing of weapons as well as on the marketing thereof. This assistance was given
because of the companys excellent BEE rating (a government imposed set of criteria that
companies in that country should abide by) in its other operations.
The company has a 31 December financial year end.
Required
a) Show the journal entries for the year ended 31 December 20X8 assuming that Anthony
Limited measures the licence at its fair value.
b) Show the journal entries for the year ended 31 December 20X8 assuming that Anthony
Limited measures the licence at its nominal amount.
c) Prepare the disclosure necessary for the government assistance not recognised in Anthony
Limiteds accounting records.
Question 27.6
Trailblazer Limited recently commenced business as a shoe manufacturer. As an incentive
for locating their factory in Themiddleofnowhere, the government agreed to subsidise half of
the cost of the construction of the factory to the maximum of C 1 000 000.
Required:
Discuss how Trailblazer limited should account for the subsidy if the factory cost C 1 600 000
to construct.
Question 27.7
Brightspark Limited a manufacturer of light bulbs recently received a government grant of C
300 000 to assist with the company cash flows pursuant to the purchase of a glass blower for
C 500 000 on 1/1/20X8. A condition placed on this grant required Brightspark to produce
10,000 light bulbs for the new parliament buildings by 31/12/20X9. Failure to comply with
part or this entire requirement would cause a proportionate amount of the grant to be
repayable.
For the 20X8 financial year Brightspark produced and installed 6,000 light bulbs in the
new parliament building. However due to frequent power cuts during 20X9 only 2,000 of
the government light bulbs were produced and installed in 20X9.
* The useful life of the glass blower was 5 years
Chapter 27
316
Required:
a) Prepare journal entries for the years ended 31 December 20X8 and 20X9, accounting for
the grant and the glass blower assuming Brightspark has a policy of accounting for the
grant as deferred income.
b) Prepare journal entries for the years ended 3 1 December 20X8 and 20X9, accounting for
the grant and the glass blower assuming Brightspark has a policy of writing off the grant
against the asset.
Chapter 27
317
[Part S[
Chapter 28
Question
28.1
28.2
28.3
Key issues
Interpretation of financial difficulties

Calculation of ratios to analyse working capital, working capital management
Purpose of financial statement analysis, calculation and explanation of ratios,
problems and limitations of financial statement analysis, advise a potential
investor
Chapter 28
319
Question 28.1
:
A company called SA Furniture Company Limited was listed on the Karachi Stock Exchange
(KSE) from 20W8 to 20X2, inclusive. In 20X3 it was eventually delisted.
The companys cash flow data for the 20W8 - 20X2 period was as follows:
SA FURNITURE COMPANY LIMITED
STATEMENT OF CASH FLOW
FOR THE YEARS ENDED
20W8
C000
Cash flows from operating
activities
63 850
Operating cash flow before
working capital changes
(83 952)
Working capital movements
102)
(20
Cash generated from
operations
(14 342)
Finance costs and taxation
(4 145)
Dividends paid
(20 862)
(17 916)
(38 589)
(33 453)
Cash flows from investing

activities
Cash flows from financing
activities
Ordinary shares
Preference shares
Long-term loans
Short-term loans
20W9
C000
20X0
C000
89 929
150 282
(84 604)
5 325
(8 763)
5 169
20X1
C000
20X2
132 792
(130 189)
cooo
197 770
67 581
(241 945) (183 071)

(91 663) (50 279)
(40 985)
(43 723)
(30 806)
(86 987)
(3 738)
(176 371) (159 078)
(23 144)
(77 993)
(58 719)
(600)
(26 559)
(3 890)
( 5 101)
246 349
26 915
577
5 928
33 420
58 500
(11029)
42 216
104 270
129 355
1465
235 090
159 678
49 703
(5 255)
163 568
(191 545)
The following additional non-cash flow data for the same period was also available:
20W8
COOO
729 571
20W9
COOO
934 052
28.03%
20X0
COOO
1 287 052
37.79%
20X1
COOO
1 409 189
9.49%
20X2
COOO
1 422 727
0.96%
Profit after tax
43 143
60 129
92 878
(79 224)
(77 120)
Share price at year-end

EPS
C7.20
C2.60
C8.00
C3.63
Cl 2.50
C5.60
Cl 1.00
(C4.56)
C0.40
(C0.43)
Sales
Sales growth
Required:
Comment on why you think this company experienced financial difficulties.
Chapter 28
320
Question 28.2
Handyman Limited is a hardware wholesaler supplying goods to do-it-yourself retailers
around the country. The company commenced operations at the beginning of the 20X3 year.
The company has been operating successfully for a number of years. Although turnover has
increased consistently, the company has recently been experiencing cash flow problems. The
managing director has approached you for advice on how to improve this situation. The
following amounts were extracted from the records of the company:
20X3
COOOs
100 000
75 000
6 000
16 500
13 000
18 750
5 000
Turnover
Cost of sales
Profit before interest and tax

Accounts receivable
Accounts payable
Inventory
Bank / (overdraft)
20X4
COOOs
20X5
COOOs
120 000
90 000
5 500
25 000
14 700
26 000
135 000
101 250
5 600
29 600
17 000
30 400
(500)
(2 000)
Required:
Identify and calculate the ratios that would be needed to analyse the working capital of the
company. Comment on the companys working capital management in the light of these
ratios.
Question 28.3
MedTech Limited is interested in acquiring a majority shareholding in Computronic Limited.
As a financial analyst you are asked to undertake an evaluation of the company and suggest
whether MedTech Limited should go ahead with the purchase of Computronic Limited or not.
The following information is available:
Financial Statements from the company
COMPUTRONIC LIMITED
STATEMENT OF COMPREHENSIVE INCOMES
FOR THE YEARS ENDED 30 SEPTEMBER
Sales
Cost of sales
Gross profit
Other expenses
Depreciation
Profit before finance charges
Finance charges
Profit before tax
Income tax expense
Chapter 28
20X1
3 850 000
(3 250 000)
600 000
20X0
3 432 000
(2 864 000)
568 000
(430 300)
(20 000)
(340 000)
(18 900)
149 700
209 100
(76 000)
(62 500)
73 700
146 600
(22 110)
(43 980)
51 590
102 620
51 590
102 620
321
I
s
COMPUTRONIC LIMITED
STATEMENT OF FINANCIAL
POSITIONS AT 30 SEPTEMBER
ASSETS
Non-current assets
20X1
20X0
360 000
344 000
836 000
402 000
52 000 1 290 000
1 650 000
715 200
351 200
57 600 1 124 000
1 468 000
460 000
220 000
680 000
460 000
203 000
663 000
8% Redeemable preference shares

(Redeemable on 30/09/20X3)
Long term loan
225 000
430 000
655 000
200 000
324 000
524 000
Current liabilities
Accounts payable
Accrued expenses
175 000
140 000
Current assets
Inventories
Accounts receivable
Cash

Share capital
Retained earnings
315 000
1 650 000
145 000
136 000
281000
1 468 000
A download from an Information Service relating to Computronic Ltd at 30 September:
20X1
C 12.00
100 000
C0.22
Share price at year end (30 Sept)

Number of shares in issue
Dividend per share
20X0
C30.00
100 000
CO.22
Industry average data for 20X1
Current ratio
Quick ratio
Inventory collection period
Accounts receivable collection period
Non-current assets turnover
Total assets turnover
Debt : Equity ratio
Interest cover ratio
Profit margin
Return on assets
Return on equity
PE ratio
2.7 : 1
1.0: 1
52 days
32 days
10.7 times
2.6 times
100%
2.5 times
3.5%
9.1 %
18.2 %
14.2
Chapter 28
322
!
:
Extract of the press release issued by the company on 12 October 20X1:
Computronic Limited is a biotechnological company that undertakes research and

development of medical innovations. The company has completed trial runs of the long
awaited anti-aging electronic treatment device. This device stimulates the production of
high growth hormone (HGH) in your body. HGH is associated with human growth and
cell health. As a mood elevator, most people find a youthful sense of wellness and a zest
for life restored when their levels of human growth hormone are increased. The
companys clinical evidence proves that by elevating our growth hormone levels we can
significantly stop and even reverse the symptoms of aging! The electronic device has
been successfully patented in Pakistan and the United States but is awaiting approval
from the Food and Drug Administration (FDA), for use in the United States of America. ..
Required:
a) Discuss the purpose of financial statement analysis.
b) Calculate the current and quick ratios for both years and briefly analyse your results.
c) Calculate the return on equity (ROE) ratio for 20X1. Explain why this ratio will be
important to MedTech Limited or any potential investor.
d) Calculate the debt to equity ratio for both years and discuss its usefulness.
e) Calculate the PE ratio for both years and discuss briefly its interpretation with particular
reference to companies with high or low ratios.
1)
Although financial statement analysis can provide useful information about a companys
operations and its financial condition, this type of analysis has some potential problems
and limitations, and it must be used with care and judgement. Discuss some problems
and limitations of financial statement analysis?
g) What would your recommendation to MedTech Limited be, about their intention of
buying a majority shareholding in Computronic Limited. Justify your recommendation.
Chanter 28
323
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Chapter 28
324

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hartered Accountants

IFRS: The pillars

IFRS: Recognition, measurement and disclosure of

IFRS: Recognition, measurement and disclosure of

Financial reporting framework

Gripping IFRS : Graded Questions

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Financial reporting framework

b) Discuss the composition of the IASB.

the requirements for fair presentation to be achieved;

inappropriate accounting treatments;

where management believes that departure from a requirement in a statement is

Gripping IFRS : Graded Questions

Gripping IFRS : Graded Questions

the Framework, how to ensure that a set of financial statements is

(IAS 1, paragraph 13)

Gripping IFRS : Graded Questions

Gripping IFRS : Graded Questions

Gripping IFRS : Graded Questions

The photocopiers are displayed on Minutemins premises and used as demonstration

Gripping IFRS : Graded Questions

BALANCE SHEET AS AT 31 DECEMBER 20X4

Gripping IFRS : Graded Questions

Payment of preference dividend

All amounts are considered to be material.

sheet of Keeptrying Ltd as at 31 December 20X4.

Gripping IFRS : Graded Questions

Gripping IFRS : Graded Questions

Presentation of financial statements

Gripping IFRS : Graded Questions

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profit and loss, other comprehensive

Gripping IFRS : Graded Questions

Presentation of financial statements

months of the financial reporting date.

twelve months of financial reporting date.

Gripping IFRS : Graded Questions

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Authorised share capital

The preference shares are non-redeemable.

There are no components of other comprehensive income

Accounting policies are not required.

Gripping IFRS : Graded Questions

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Retained earnings - 1/1/20X8

There are no components of other comprehensive income

Analysts of expenses by function

Presentation of financial sta tements

TRAVEL BUG LIMITED

Telephone expense prepaid at 31 December 20X3 is C4 000. Telephone expenses are

Depreciation is distributed as follows:

Other expenses are allocated to the entity's core functions as follows:

Gripping IFRS : Graded Questions

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There are no components of other comprehensive income

year ended 31 December 20X3.

No notes are required.

Ignore deferred tax.

Retained earnings - 1/3/20X8

Gripping IFRS : Graded Questions

Presentation of financial statements

Electricity of C2 000 is still payable at 28/2/20X9.